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 banks reserve requirement ratio to the banks loan to deposit ratio. When a banks loan to deposit ratio increases the bank will have a smaller ratio of reserve requirement. This incentive mechanism was implemented to accomplish Bank Indonesias 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.
-
About Us
-
Events
-
Publications
-
About The SEACEN Centre
-
The Centre's Governance
-
Courses
