Reserves, deposits and loans

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Reserves, deposits and loans

Reserves, deposits and loans

Friday, March 9, 2012
  • Reserves Deposits Loans
It’s one thing for a layman not to grasp the intricacies of macro-economics – but its quite another for analysts and economists to make basic mistakes. (Graphic by Dayang Norazhar/The Mole)

RM420 billion refers to international reserves, which are not “ringgit deposits” – what the hell do international reserves have to do with bank lending?

 

The level and change in reserves ONLY effects credit growth under a fixed exchange rate regime or a currency board, but ONLY if the central bank does unsterilised intervention and ONLY if banks respond to the higher liquidity conditions by chasing yield (i.e. lending more AND/OR buying higher yielding securities).

 

The link between international reserves and liquidity conditions in the banking sector doesn’t exist under a floating rate regime such as Malaysia operates today – central bank intervention under those circumstances is purely discretionary, hence changes in reserves signals absolutely nothing about future lending or banking sector liquidity.

 

Even under a fixed exchange rate regime, the influence is conditional and the causality runs the other way – higher reserves signals (i.e. is caused by) higher liquidity, not the other way around.

 

Read more at ECONOMICS MALAYSIA.