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The Macro-prudential aspects of loan-to-deposit-ratio-linked reserve requirement

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  • Satria
  • Harun
  • Taruna

Abstract

Micro-prudential regulation is sometimes more focused on the health of the financial institutions and pays less attention to the objective of sustainable intermediation and financial stability in the long run. A macro-prudential policy is formulated to reduce this myopic tendency. This article shows analytically how Loan-to-Deposit-Ratio (LDR)-linked Reserve Requirement (RR) can be used to apply counter-cyclical measures in banking industry by providing disincentive mechanism when a bank operates outside the preferred operational corridor. At the lower limit of LDR, a requirement of higher RR can push banks to extent more loans in order to support economic development in a period of economic bust. At the upper limit of LDR, a requirement of higher RR and/or capital can also provide disincentive to slow down its investment activities in an economic booming period and manage liquidity risk better.

Suggested Citation

  • Satria & Harun & Taruna, 2016. "The Macro-prudential aspects of loan-to-deposit-ratio-linked reserve requirement," Applied Economics, Taylor & Francis Journals, vol. 48(1), pages 24-34, January.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:1:p:24-34
    DOI: 10.1080/00036846.2015.1073840
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    References listed on IDEAS

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    5. Iman Gunadi & Cicilia A. Harun, 2011. "Revitalising Reserve Requirement In Banking Model: An Industrial Organisation Approach," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ51.
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