The Market for Negotiable Certificates of Deposit in Australia: 1973–1980

Liability management by the Australian trading banks is a relatively recent development, largely made possible by the inroduction of negotiable certificates of deposit (NCD’s). The market for NCD’s also acts as an important link in transmitting credit market disturbances to non-bank financial intermediaries. Relatively little attention has been paid to analysing the working of this market in Australia. This paper presents and estimates two models of the NCD market. In the first case the hypothesis of short term rationing, that arises from various restrictions on the operation of the market, is tested. The second model assumes that the market clears in the short run but adjusts with a lag to the desired long run position. Our results favour the second model. In addition, the demand for NCDs by the non-bank public depends on wealth and interest rates. The supply of NCD’s by the banks depends on the banks liquidity position and on interest rates. The results suggest that banks may use asset management instead of liability management when rates rise on liquid assets of the banks. Adjustment by the non-bank public to the long run demand is instantaneous, while the banks adjust with a lag. Our results suggest that approximately 84 per cent of the adjustment in the banks’ supply occurs within one year.