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Over the past decade policy makers in Latin America have adopted a number of macroprudential instruments to manage the procyclicality of bank credit dynamics to the private sector and contain systemic risk. Reserve requirements, in particular, have been actively employed. Despite their widespread use, little is known about their effectiveness and h...
Contexts in source publication
Context 1
... In some instances, targeted sectoral measures have also been employed, such as the tightening of capital requirements to address the rapid loan growth in specific market segments (e.g., automobile consumer loans involving long maturities or high loan-to-value ratios in Brazil) and, more recently, reserve requirements on banks' short spot dollar positions (Brazil) to limit over borrowing. 2 A summary of the recent use of macroprudential measures in Latin America is reported in Table 1. ...
Context 2
... is particularly relevant in the case of marginal RRs, an issue that we discuss further below. Table 1. ...
Context 3
... rates, economic activity and credit growth enter the system in differences. The other macroprudential instruments include the array of macroprudential measures listed in Table 1, for example, such as capital requirements, liquidity requirements, and limits on foreign exchange positions. The system in (1) is estimated using system Generalized Method of Moments (see Holtz-Eakin, Newey, and Rosen, 1988) and its results are analyzed using impulse responses. ...
Citations
... The cut, which is the second this year following the first cut in February, will be effective from May 18, 2012. When a crisis happens in a country which is assigned by a growing inflation, an increase of reserve requirement ratio will help to maintain the stability of credit [27]. ...
Enhancing the inclusivity, safety, resilience, and sustainability of urban areas, as outlined in Goal 11 of the Sustainable Development Goals (SDGs) to be accomplished by 2030, entails ensuring universal access to adequate, secure, and affordable housing along with essential services, and the enhancement of informal settlements. Consequently, numerous megacities worldwide grapple with burgeoning populations, precipitating a surge in housing costs, particularly exacerbated by volatile financial environments. The post-2013 financial recuperation in the United States precipitated a capital exodus towards Emerging economies, precipitating currency depreciation and imported inflation due to heavy reliance on foreign reserves. In response, the Indonesian central bank augmented reserve requirements to curtail money supply, while its Chinese counterpart reduced such requisites to stimulate economic expansion. This inquiry endeavors to discern the short-term impact of heightened reserve requirements on consumer, investment, and working capital credit pertinent to housing consumption, and in the long run, examines their ramifications on total output within the current account. Employing the Vector Error Correction Model (VECM), this study scrutinizes the central bank's credit policies' influence on overall output over both temporal horizons. Augmenting reserve requirements, integral to banks' balance sheets, impinges on liquidity and credit provisioning capacities, affecting not only consumer and housing credit but also investment and working capital credit, crucial financing conduits bolstering real sector activity and economic growth.
https://ejournal.uin-suska.ac.id/index.php/JSMS/article/view/25895
... For example, if the funds that are not subject to reserve requirements are also not covered by deposit insurance, banks will face an adverse selection problem that will disable their ability to fully substitute one unit of insured funds with one unit of non-reservable funds, hence, their lending behavior can be affected. Although other countries also applied reductions in their reserve requirements during the pandemic, 1 the usage of these type of instruments has a long history in the region (Cordella et al. (2014), Tovar Mora et al. (2012), Federico et al. (2014)). ...
As a response to the COVID-19 shock, the Uruguayan government expanded an existing public credit guarantee and introduced deductions in local currency reserve requirements. Policies of the same nature were also implemented by several governments throughout the world. This paper contributes to the financial additionality literature and the literature on the bank lending view of the monetary policy by analyzing the impact of this type of policies on loans’ interest rate spread over the interbank rate. Using a very detailed database on loan contracts, we estimate a dynamic panel model to analyze the effects of policy responses to the COVID-19 shock over loan interest rates. We find that the PCG policy had a relatively higher effect on loans’ interest rates in comparison to the reserve requirements policy.
... RR can affect the level of loan creation, as indicated by the original conception of RR as a liquidity and credit tool. RR under a modernized monetary framework, particularly under IT, can also be utilized to enhance bank portfolios by controlling wholesale funding and FX-denominated deposits (e.g.,Garcia-Escribano et al. 2012), thereby reducing systemic risk. However, this negative effect on systemic risk could be counterbalanced by the positive effect of RR, which raises banks' funding costs and creates adverse pressures on bank profits.Garcia-Escribano et al. (2012) find that RR have a moderate and transitory effect in slowing the pace of credit growth in Latin America. ...
... e utilized to enhance bank portfolios by controlling wholesale funding and FX-denominated deposits (e.g.,Garcia-Escribano et al. 2012), thereby reducing systemic risk. However, this negative effect on systemic risk could be counterbalanced by the positive effect of RR, which raises banks' funding costs and creates adverse pressures on bank profits.Garcia-Escribano et al. (2012) find that RR have a moderate and transitory effect in slowing the pace of credit growth in Latin America. 7 Foreign-currency exposures of a country's banks may jeopardize financial stability when the exchange rate depreciates (is devalued) in floating (fixed) exchange rate regimes and, especially, in small open economies(Georgiadis et a ...
... Therefore, the need for banks to pay attention to the growth of the money supply. It is interesting to further analyze the impact of one of the macro indicators, namely the policy rate and liquidity of the bank as an illustration of future credit risk management, because it can affect the possibility of banking profit and loss (Tovar et al., 2012). This is because the role of banking is very large as a determinant of economic development, economic growth and can improve welfare in society. ...
Lending plays a vital role for banks as a source of income from deposits or interest paid by debtors. This study aims to analyze the effect of policy interest rates and liquidity from the money supply on bank credit risk in Indonesia in the short and long term. This study uses the Autoregressive Distributed Lag method and the Granger Causality test as analytical tools. The data used are policy interest rates, total money supply, and total non-performing loans. The data period under study is 2017-2022. The study results show that in the short term, policy interest rates and the money supply negatively affect bank credit risk in Indonesia. However, in the long term, policy interest rates have a negative effect, and the money supply does not affect bank credit risk in Indonesia. Policy interest rates have a one-way causality relationship with bank credit risk. Meanwhile, bank credit risk has a one-way causality relationship to the money supply. This condition represents that policy interest rates can reduce bank credit risk in Indonesia. The Bank of Indonesia, as the monetary authority, needs to pay attention to fluctuations in policy interest rates and mitigate excess money supply so that credit risk does not increase.JEL Classification: F43, O11, P34How to Cite:Amalia, S. Q., & Suriani, S. (2023). Do Interest Rate Policy and Liquidity Affect Banking Credit Risk in Indonesia?. Signifikan: Jurnal Ilmu Ekonomi, 12(1), 145-160. https://doi.org/10.15408/sjie.v12i1.27119.
... Finally, the fact that some measures have different impact on booms and on busts calls for an integrated, comprehensive, and holistic approach to macroprudential regulation, going beyond Tinbergen's Rule (Tinbergen 1952) and adopt multiple instruments to multiple objectives. 51 See for an analysis of the impact of macroprudential policies on Latin American economies.See also, Jacome et al. (2012); ; and Tovar (2012). 52 This states that the number of achievable policy goals cannot exceed the number of policy instruments. ...
... These developments motivated the tax on external credit. This help to explain why changes in RRs were more effective in easing instances than in tightening episodes (Tovar et al 2012, Blanco Barroso et al 2020. Loosenings of RRs rules increased liquidity at times of market stress, preventing credit crunches. ...
Chapter on the impact of financial liberalization on growth and structrual change. Book edited by Esteban Pérez Caldentey, Matias vernengo and Martin Abeles
... Finally, the fact that some measures have different impact on booms and on busts calls for an integrated, comprehensive, and holistic approach to macroprudential regulation, going beyond Tinbergen's Rule (Tinbergen 1952) and adopt multiple instruments to multiple objectives. 51 See for an analysis of the impact of macroprudential policies on Latin American economies.See also, Jacome et al. (2012); ; and Tovar (2012). 52 This states that the number of achievable policy goals cannot exceed the number of policy instruments. ...
... These developments motivated the tax on external credit. This help to explain why changes in RRs were more effective in easing instances than in tightening episodes (Tovar et al 2012, Blanco Barroso et al 2020. Loosenings of RRs rules increased liquidity at times of market stress, preventing credit crunches. ...
This document is a compilation of research studies undertaken by the Economic Commission for Latin America and the Caribbean (ECLAC) for the project ”Response and Recovery: Mobilizing financial resources for development in the time of COVID-19”, which was coordinated by the Debt and Development Finance Branch of the United Nations Conference on Trade and Development (UNCTAD) and jointly implemented with ECLAC, the Economic Commission for Africa (ECA) and the Economic Commission for East Asia and the Pacific (ESCAP). The publication has three objectives. The first is to present a comparative analysis of 19 country case experiences in Africa, Asia and Latin America with the use of capital controls. Capital controls refer to different types of government intervention in the financial account of a country’s balance of payments with the objective of restricting either financial outflows or inflows, or both. These representative case studies serve to illustrate the objectives and modalities guiding capital flow regulation. They provide a basis on which to draw important policy lessons and guidelines regarding the feasibility and effectiveness of capital controls for sustained growth. Following a similar logic and using the same countries, a second objective is to provide a critical assessment of macroprudential regulation in theory and practice. Macroprudential regulation is broadly defined as a set of policies aimed at reducing systemic risk originating in systemic externalities, either over time or across institutions and markets. It is shown that macroprudential regulation can be an elusive concept and of limited applicability. The critique covers both mainstream and heterodox approaches to macroprudential regulation. The third objective is to describe and make explicit the relationships and transmission mechanisms linking the external sector to the domestic economy.
... In this paper, we explorein the context of an emerging marketthe impact of using the reserve requirements, combined with FX intervention, as key instruments in an inflationtargeting framework. Other studies such as Glocker and Towbin (2015) and Tovar et al. (2012) use structural vector autoregression (SVAR) to examine the effect of reserve requirement on the macroeconomy. However, their study did not discuss the dynamics between monetary policy, FX intervention and reserve requirements, three main policies for the emerging economies that adopt inflation-targeting framework to tackle current challenges, particularly the capital flows volatility. ...
... They also argue that the impact of reserve requirements on credit as a proportion of GDP is positive in the long run. Tovar et al. (2012), meanwhile, report that, based on data from Latin America, reserve requirements have an effect on credit growth. They also argue that reserve requirements complement monetary policy. ...
Purpose
This paper examines the impact of using the reserve requirements, combined with foreign exchange (FX) intervention, as key instruments in an inflation-targeting framework.
Design/methodology/approach
In the context of a dynamic stochastic general equilibrium (DSGE) framework and using Bayesian techniques, the authors estimate a model for the Indonesian economy using quarterly data spanning the period 2005Q2–2019Q4.
Findings
The reserve requirement is found to assume a complementary role to that of the interest rate policy and FX intervention when used to stabilise the macroeconomy.
Originality/value
This paper provides a benchmark for other emerging countries that consider adopting the inflation targeting framework and impose an FX intervention as part of their monetary policy.
... Early studies either used a single or cumulative dummy variables to assess the impact of an introduction or change to a specific prudential policy tool. Lim et al. [45], Tovar et al. [53], or Arregui et al. [7] utilised them in their respective event studies. Kuttner and Shim [40] expanded this type of analysis by adding up the (− 1, 0, + 1) dummy variables, if during one period there was more than one policy action taken. ...
The heterogeneity of the banking sector is a vital problem both in case of the conduct of macroprudential policy, as well as the assessment of its effectiveness. To address this issue, we construct a new measure of macroprudential policy restrictiveness, the bank’s free lending capacity ratio (the quotient of a new lending a bank can extend given its capital surplus above capital requirement, and its current volume of loans). We describe its advantages over the measures used in the previous research. Finally, employing first difference GMM method on (dynamic) panel data series, we explain the drivers of changes in lending growth of stock-listed banks in Poland between 2010 and 2020. We show that the free lending capacity ratio displays the most convincing results among the examined variables, pointing at its usefulness both in explaining and evaluating the impact of prudential regulation on banking activity, as well as in understanding potential issues in the transmission of monetary policy via the banking sector, resulting from its heterogeneity. Finally, we draw practical and policy-related conclusions, as regards the measurement of macroprudential policy restrictiveness.
... Марказий банкдаги мажбурий захира қолдиғи, млрд.сўмда. 8 Ўзбекистон Республикаси Марказий банкида мажбурий захира сифатида тижорат банкларининг катта ресурси сақланар эди. Хусусан, 2016 йилда мажбурий захира қолиғи 3610,29 млрд.сўмни ...
... Ўзбекистонда тижорат банкларида хорижий валютадаги аҳоли депозитлари фоизи билан юридик шахслардан жалб қилаётган депозитлар фоизи ўртасида кучли боғлиқлик мавжуд. 8 Ўзбекистон Республикаси Марказий банк расмий сайти www.cbu.uz маълумотлари. ...
This article analyzes the mandatory reserve instrument from monetary policy instruments. Based on the selected indicators, the SVAR model was formed on the impact of the mandatory reserve instrument on the interest policy of commercial banks. According to the results of the model, the mandatory reserve percentage for foreign currency deposits of legal entities has a strong effect on the percentage of short-term foreign currency deposits of the population in commercial banks. The statistical significance of the effect of this mandatory reserve norm on the percentage of short-term deposits of legal entities in commercial banks and on the percentage of loans in foreign currency allocated to them is low. Also, the impact of the devaluation of the national currency on the interest policy of commercial banks was insignificant. The reason for this is that commercial banks have not combined the constant devaluation indicator with the interest policy. On the contrary, the inflation rate had a high impact on the interest policy of commercial banks. Apart from the influence of the above endogenous indicators on the interest policy of commercial banks, the autocorrection of interest rates in commercial banks is becoming stronger.
... The results reveal that housing credit growth is affected by housing-related taxes, the maximum loan-to-value ratio and the maximum debt-service-to-income ratio. Tovar, Escribano, & Martin (2012) examined the effects of reserve requirements and other macroprudential policies on credit growth, with panel data Vector Auto Regression (VAR), using information from five Latin American countries over the period from January 2003 to April 2011. The results suggest that the reserve requirement has a short-term effect on credit growth. ...
... Macroprudential measures used recently by some Latin American countriesOtherFacilitate capital outflows and simplify pressure on the currency, domestic demand, and consumer prices Source:Tovar, Escribano, & Martin, 2012 ...
In this chapter, the concept of financial instability is examined in terms of the policy instruments used by central banks. Although the policy instruments used in each country differ according to the country conditions, it is thought that the common factor among developing countries with a current account deficit problem is exchange rate volatility resulting from excessive credit growth and short-term capital movements. In this context, Argentina, Brazil, Chile, Colombia, Hungary, Indonesia, India, Mexico, Poland, South Africa, and Turkey are examined with regard to the effects of macroprudential policies on financial stability for the period between Q2 of 2006 and Q2 of 2017 by using the time-varying panel causality test developed by Dumitrescu and Hurlin. The results of the analysis indicate that excessive credit growth is a cause of the current account deficit. The same findings are also valid for interest rate. There is no obvious link between the exchange rate and the current account deficit.
