Bank of Papua New Guinea Endorses Emergency Liquidity Assistance Policy Framework

BANK OF PAPUA NEW GUINEA
Emergency Liquidity Assistance
Guidelines:
Policy Framework and Principles
April 2026

PURPOSE
Section 76 of the Central Banking Act 2000 (as amended) provides that the Bank of Papua
New Guinea (Bank of PNG) may act as Lender of Last Resort (LLR), lending to a commercial bank or supervised financial institution, where necessary, to safeguard monetary stability and maintain financial system stability. Emergency Liquidity Assistance (ELA) is a measure available under the LLR to the Bank of PNG to support financial system stability by providing temporary funding to eligible commercial banks experiencing severe short-term liquidity pressures. This document sets out the high-level, principles-based, framework guiding the Bank of PNG’s approach to the ELA support. It outlines the considerations, constraints, and policy stance that will inform decisions on whether, when, and how such support may be provided. This framework is indicative and does not create any entitlement to the ELA support. All decisions remain at the sole discretion of the Bank of PNG, taking into account prevailing circumstances. The framework also serves as a foundation for further operational development, ensuring readiness in times of significant financial stress. BROAD PRINCIPLES These principles will guide the detailed design and implementation of the ELA Policy.

• Being ready to act as lender of last resort is a fundamental element of the Bank of
  PNG’s role as a central bank.

• The Bank of PNG will lend only to commercial banks that are assessed to be solvent
  and viable, including on a forward-looking basis.

• The Bank of PNG will lend to commercial banks only if all their other available liquidity
  sources have been fully utilised, including established Bank of PNG liquidity management facilities.

• Any and all such lending will be made only on the security of adequate collateral.

• Where the Bank of PNG has decided to provide liquidity assistance, fully secured, the
  focus will be on providing sufficient liquidity to end the run (or risk of a run).

• The focus of the policy is on the soundness and stability of the monetary and financial
  system, not on protecting the position of any one individual financial institution.

• ELA loans will be charged at rates materially above market interest rates. The Bank
  determines the terms and conditions of the ELA, including the amount, duration, interest rate and any other applicable requirements. As required by the Central Banking Act and related laws, where the Bank of PNG cannot be reasonably confident of its solvency and/or its ability to provide sufficient collateral ELA will be extended to a commercial bank only if the Government provides and executes a full guarantee of any such loan. The Bank of PNG recognises that moral hazard (commercial banks may take on more risk because of liquidity support provided by the central bank) is a critical issue and will be closely monitored, consistent with its statutory objectives. ELA is not a right or a standing facility. Access to ELA is at the sole discretion of the Bank of PNG, and approval is neither automatic nor guaranteed under any circumstances. ELA may need to be considered in a variety of quite different sets of circumstances, some unfolding gradually, some quite suddenly, and some possibly as part of a re-establishment of a bank where there had already been supervisory interventions. Further operational planning will be designed to build systems that are sufficiently flexible and responsive, and prepositioned as far as possible, to effectively cope with a range of liquidity crisis scenarios. SYSTEMIC FOCUS
  Section 76 of the Central Banking Act emphasises the objective of safeguarding monetary
  stability and maintaining financial system stability, rather than protecting individual commercial banks (notwithstanding that any particular liquidity support loan is extended to a specific commercial bank). This does not imply that support is limited to systemically large commercial banks. In assessing whether to provide liquidity support, the Bank of PNG’s primary consideration is the extent to which a commercial bank’s distress could pose systemic risk, including through contagion effects, interconnectedness, or a loss of confidence that could disrupt the functioning of the financial system. Accordingly, even distress in a relatively small commercial bank may warrant consideration where it has the potential to impair financial intermediation, disrupt payment systems, or trigger broader instability. SOLVENCY AND VIABILITY Assessments of solvency and viability in an emerging crisis are ongoing, forward-looking judgments and will need to remain open to revision as long as any ELA loan remains outstanding (no more than 12 months in total).

POTENTIAL COLLATERAL
Prior to any decision to provide liquidity support, a commercial bank will be expected to have fully utilised all other available liquidity sources. This includes, at a minimum, full utilisation of available monetary policy facilities. Under current arrangements, domestic government securities and Central Bank Bills may be used in repurchase (repo) agreements with the Bank of PNG to generate settlement cash. In principle, the Bank of PNG will provide the ELA on a fully secured basis against the unencumbered assets of a commercial bank. Only a few other readily marketable and transferable securities are on issue in Papua New Guinea. For example, there are no residential mortgage-backed securities already packaged in the Papua New Guinea market, and corporate loans are often bespoke. The detailed guidelines will give operational form to this in-principle willingness to use illiquid assets as collateral for the ELA. Even if such assets were readily transformable or assignable and appropriate legal documentation were in place or pre-positioned, the challenges of valuing them in potential systemic crises would be formidable. Accordingly, substantial haircuts and concentration limits could be expected to be applied to limit the risk to the Bank of PNG and to the public finances more generally. This will allow margin calls if the valuation of the collateral supporting any ELA loan has materially worsened. VOLUME OF LENDING The Bank of PNG will closely monitor actual and emerging liquidity pressures on commercial banks considered for the ELA support. In determining how much to lend to a particular borrower, the Bank of PNG will coordinate a range of information, including any projections of liquidity needs and the likely ability to rebuild the deposit book. PRICING The general principle for ELA lending is that such loans should normally command an interest rate well above that of normal secured loans in the Papua New Guinea market. That sort of pricing helps deter borrowers from unnecessary drawdowns and from structuring their asset books in the expectation of relying on relatively cheap central bank funding in the event of an adverse shock. The Bank of PNG will aim to ensure that lending is priced consistently across banks.

CURRENCY
The Bank of PNG would expect ELA to be made in kina and secured on assets denominated in kina or located in Papua New Guinea. INFORMATION REQUIREMENTS AND CONDITIONALITY Commercial banks requesting ELA must meet the information requirements of the Bank of PNG and/or its professional advisors and accept ongoing surveillance. Daily liquidity monitoring would be a requirement during any ELA funding period. The borrowing commercial bank should expect rigorous regulatory and supervisory oversight. For each loan, remedial actions and conditions (likely to be circumstance-specific in many cases) will be enforced through an ELA Agreement, which specifies all terms, conditions, and obligations of both parties. For loans expected to be outstanding for more than a few weeks, these will include requirements for credible funding plans, consistent with enabling the institution to graduate from the need for ELA (noting that the statutory limit on any such loans is 12 months). INSOLVENCY OR BANKRUPTCY ELA support will be provided at the discretion of the Bank of PNG only to commercial banks assessed as solvent and viable, including on a forward-looking basis. Those assessments are not made with certainty, and there is a risk that a borrowing commercial bank will fail while an ELA loan remains outstanding. The law requires that the documentation and procedures the Bank of PNG develops are such that, in the event the borrowing commercial bank fails, the Bank of PNG ranks ahead of all other debts of the institution. PUBLICATION AND DISCLOSURE The Bank of PNG has a strong commitment to being open and transparent about its market operations and balance sheets. The ELA loan represents a significant financial risk to taxpayers, so it is appropriate to disclose adequate information, consistent with the primary policy goal of supporting monetary and financial stability. In some circumstances, immediate public disclosure of an ELA loan could worsen any run by depositors on an otherwise sound commercial bank. Disclosure practices, therefore, need to balance transparency with financial stability considerations. This document forms part of the Bank of PNG’s ex-ante disclosure of the ELA framework. The Bank of PNG will be working towards developing a more detailed approach to publication and disclosure.

OPERATIONAL DETAILS
The Bank of PNG will undertake further extensive work, with a particular focus on how ELA loans might be operationalised in the PNG context. Some aspects of that work are likely to be subject to consultation with interested and potentially affected parties. The Bank of PNG aims to publish as much of the finished work as is appropriate, consistent with its commitment to transparency and accountability.