The Impact Of Bank Liquidity Risk On The Channeling Of Loans

Iman Gunadi and Aditya A. Taruna ()
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Aditya A. Taruna: Bank Indonesia

No WP/11/2015, Working Papers from Bank Indonesia

Abstract: The function of banks as intermediation institutions is carried out through the channeling of loans to the general public as customers. This function supports increased efforts at the level of debtors, which consequently gives a push to the economy and boosts a country’s economic growth. In this research, we will review the relationship between the availability of liquid assets owned by banks and the potential of banks to channel loans in the event of increased liquidity risk due to a decline in the liquid assets of banks which stems from excessive bank lending. Without adequate liquid assets, banks can face difficulties in channeling loans. The calculation of a bank’s potential lending—which is related to the condition of its liquid assets—is expected to provide an overview of the strategies taken by banks to channel loans. This potential is then defined as the potential to achieve the lending target and the potential to channel loans. By using a mathematical simulation, this research proves that there is a correlation between liquid assets and bank lending. Besides that, there is evidence that the majority of banks always conduct lending below their potential regardless of the level of their LA/NCD ratio.

Keywords: bank liquidity; bank lending; economic growth (search for similar items in EconPapers)
JEL-codes: G21 O4 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2015-12
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http://publication-bi.org/repec/idn/wpaper/WP112015.pdf First version, 2015 (application/pdf)

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