Revitalising Reserve Requirement In Banking Model: An Industrial Organisation Approach

Iman Gunadi and Cicilia Harun

in Occasional Papers from South East Asian Central Banks (SEACEN) Research and Training Centre

Abstract: The objective of reserve requirement as a policy tool is mainly to control money supply in the economy. However, the changes of reserve requirement also affect banks´ interest rates. Thus, the changes will have an effect on banking optimal behaviour in maximising profits. Using the industrial organisation approach, this paper will evaluate the Indonesian banking sector in the course of designing an unconventional reserve requirement policy that link a bank´s reserve requirement ratio to the bank´s loan to deposit ratio. When a bank´s loan to deposit ratio increases, the bank will have a smaller ratio of reserve requirement. This incentive mechanism was implemented to accomplish Bank Indonesia´s intentions of increasing loan growth and reducing the “excess liquidity” in the Indonesian banking sector. The paper reveals that the policy is effective in boosting bank loans and consequently decreasing excess liquidity. It also suggests that the policy could provide another tool for the central bank to impact bank liquidity in order to support financial system stability.

Date: 2011
ISBN: -
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.seacen.org/GUI/pdf/publications/occasional/2011/occ51/occ51.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.seacen.org/GUI/pdf/publications/occasional/2011/occ51/occ51.pdf [301 Moved Permanently]--> https://www.seacen.org/GUI/pdf/publications/occasional/2011/occ51/occ51.pdf)

Related works:
Working Paper: Revitalizing Reserve Requirement in Banking Model: An Industrial Organization Approach (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sea:opaper:occ51

Access Statistics for this book

More books in Occasional Papers from South East Asian Central Banks (SEACEN) Research and Training Centre Contact information at EDIRC.
Bibliographic data for series maintained by Azharin ().