Foreign exchange intervention and the banking system balance sheet in emerging market economies

Blaise Gadanecz, Aaron Mehrotra and Madhusudan Mohanty

No 445, BIS Working Papers from Bank for International Settlements

Abstract: Large-scale forex intervention in emerging market economies (EMEs) aimed at resisting currency appreciation has major implications for the composition of banking system balance sheets. The domestic monetary consequences depend on the nature of central bank liabilities that are the counterpart of forex reserves. Even if the immediate change in bank reserves due to FX intervention is offset by the sale of securities, bank lending may still be stimulated, running counter to the aims of the monetary authority. In this paper, we empirically investigate the impact of banks’ holdings of liquid government securities, generated by such intervention, on bank credit in a panel of EMEs. We find that, for well capitalised banking systems, holdings of government and central bank paper over time lead to an expansion in their credit to the private sector. This result is confirmed at both country and bank level. The balance sheet effects of large-scale FX intervention therefore require close attention.

Keywords: bank lending; sterilised intervention; foreign exchange reserves; central bank securities; emerging market economies (search for similar items in EconPapers)
Pages: 34 pages
Date: 2014-03
New Economics Papers: this item is included in nep-ban and nep-cba
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Citations: View citations in EconPapers (20)

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