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Revitalizing Reserve Requirement in Banking Model: An Industrial Organization Approach

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  • Iman GUNADI

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.
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  • Iman GUNADI, 2010. "Revitalizing Reserve Requirement in Banking Model: An Industrial Organization Approach," EcoMod2010 259600068, EcoMod.
    • Handle: RePEc:ekd:002596:259600068
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    Cited by:

    1. Rani Wijayanti & Nur M Adhi P & Cicilia A Harun, 2020. "Effectiveness of macroprudential policies and their interaction with monetary policy in Indonesia," BIS Papers chapters, in: Bank for International Settlements (ed.), Measuring the effectiveness of macroprudential policies using supervisory bank-level data, volume 110, pages 31-50, Bank for International Settlements.
    2. 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.
    3. Iman Gunadi & Advis Budiman, 2012. "Optimisation of Bank Portfolio Composition in Indonesia," EcoMod2012 4166, EcoMod.

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