The determinants of excess liquidity in the Algerian banking system

The paper investigates the precautionary and involuntary determinants of excess liquidity in the Algerian banking system over the period Q1 1995–Q1 2019. Through the autoregressive distributed lag bounds test approach, the results show that the excess liquidity is a consequence of lagged excess liquidity to deposit ratio, required reserves to deposit ratio and the output gap in the short run. In the long-run, Algerian Banks demand excess liquidity for precautionary and involuntary factors. The precautionary determinants include required reserves to deposits ratio, volatility of currency in circulation to deposits ratio and the discount rate. The involuntary determinants reflect four characteristics of the Algerian banking system. The first is the impact of hydrocarbon revenues in excess liquidity indirectly by financing the State’s expenditures. The second is the development of total bank deposits, which are largely determined by hydrocarbon exports. Third, public companies continue to dominate bank loans at the expense of the private sector share. Fourth, government debt markets are underdeveloped and government intervention continues to force banks to make regular purchases of government bonds. The banks can avoid the cost of excess liquidity by enhancing the credit to private sector.