1. To borrow cash from the Central Bank via the corridor, the borrowing bank must provide a guarantee.
2. The Central Bank lends the bank a value less than the value of the guarantee by 3% in order to avoid the risk of a decrease in the value of the guarantee.
3. The borrowing is for one night and is renewable.
4. The CBE is resorted to in the event of scarcity of interbank liquidity and the rise in the overnight lending rate above the maximum limit of the corridor.
Details
The rules regulating the corridor rate were issued on February 8, 2005, by the Board of Directors of the CBE.
According to the rules, the corridor represents the maximum and minimum overnight interbank rates.
The interest of the corridor is currently 11.25% for deposits of banks in the Central Bank (the minimum) and 12.25% for lending to banks by the Central Bank (the maximum).
The process in the case of lending
The bank sends a message to the Central Bank expressing its desire to borrow overnight using the interest rates announced by the Reuters Dealing System.
Simple Example
1. The CIB wants to borrow 90 EGP for one night at the corridor rate of 12.25% per annum.
2. To calculate the daily interest, the 360-day annual interest is calculated as follows:
12.25% x (1/360) = 0.0003 or 0.03%/day.
3. The CBE requires the existence of a guarantee for the loan in the form of treasury bills. In this case, the CIB uses general maturity treasury bills as a guarantee.
The present value of treasury bills used as collateral is determined as follows:
Present value = Par value/(1 + Discount Yield)
And the interpretation of the par value and the discount Yield is as follows:
Par value = nominal value = EGP 100 for example
Discount Yield = Annual Yield x Days to Marurity/365
If the annual return = 12% and the remaining days to the maturity date = 180 days, then the value of the current authorization = PV = 100/(1 + 12.25% x 180/365) = PV = 100/(1 + 6%) = EGP 94.3
4. 3% of the current value of the permission is deducted to calculate the value of the loan authorized by the Central Bank. The purpose of this discount is to insure the central bank against the risk of depreciation of the collateral before the loan is repaid.
Loan value = EGP94.3 x 97% = EGP91.5
5. The Central Bank is approved to lend the CIB EGP 91.5 in exchange for treasury bills worth EGP 94.3 as a guarantee for one night.
6. The next day, the principal + interest is paid by the CIB
EGP 91.50 x (1.0003) = EGP 91.53
7. And in the event that there is no guarantee sufficient to borrow the EGP 91.5, the CIB is informed of the refusal of the operation.
How does the CBE corridor actually work?
