The use of reserve requirements as a policy instrument in Latin America Carlos Montoro VII Meeting of Central Bank Monetary Policy Managers CEMLA

Transcription

1 The use of reserve requirements as a policy instrument in Latin America Carlos Montoro VII Meeting of Central Bank Monetary Policy Managers CEMLA Rio de Janeiro Brazil, 7-8 April,

2 The use of reserve requirements (RR) in three IT Latin American economies (Brazil, Colombia and Peru) Policy dilemmas faced. Why use reserve requirements? How effective are reserve requirements? Side effects of reserve requirements 2

3 RR rates fell in may countries in the last years Reserve requirement ratios and 1990, in per cent, logarithmic scale AR = Argentina; AU = Australia; BR = Brazil; CA = Canada; CC = Denmark, Hong Kong SAR, Mexico, New Zealand, Norway and Sweden; CH = Switzerland; CL = Chile; CO = Colombia; CZ = Czech Republic; GB = United Kingdom; HU = Hungary; ID = Indonesia; IL = Israel; IN = India; JP = Japan; KR = Korea; MY = Malaysia; PE = Peru; PH = Philippines; PL = Poland; SA = Saudi Arabia; SG = Singapore; SK = Slovakia; TH = Thailand; TR = Turkey; US = United States; VE = Venezuela; XM = euro area; ZA = South Africa. 1 Midpoint in range for Argentina, Brazil, Canada, Chile, Indonesia, Israel, Japan, Korea, Poland, Saudi Arabia, South Africa, Switzerland and the United States. Average of midpoints for the euro area, Sources: Forssbæck and Oxelheim (2007); Kemal (1994); Kneeshaw and Van den Bergh (1989); Mohanty and Turner (2008); O Brien (2007); Schwartz (1998); Van t dack (1999); national data; BIS calculations. Graph 1 3

4 Policy dilemmas Prior to Lehman Brothers bankruptcy (Sep. 2008): high capital inflows + economic overheating. Dilemma: rising interest rates to control inflation and credit growth risked attracting even more capital inflows (expansionary). After Lehman Brothers bankruptcy: contraction in capital inflows and tightening of financing conditions. Needed to stabilise financial markets. 4

5 Policy dilemmas Capital flows, domestic bank credit and inflation In per cent Total gross capital flows 1 Domestic bank credit 2 Inflation 3 The vertical line marks the date of the Lehman Brothers bankruptcy on 15 September As a percentage of GDP. 2 Annual changes in real domestic bank credit to the private sector. 3 Annual changes in consumer price index. Sources: IMF; national data. Graph 2 5

6 Policy responses Reserve requirements and reference rates In per cent Brazil Colombia 2 Peru The vertical line marks the date of the Lehman Brothers bankruptcy on 15 September For Brazil, SELIC target rate; for Colombia, minimum expansion rate; for Peru, reference rate. 2 The dashed lines represent marginal reserve requirements on savings accounts (green) and current accounts (blue). 3 For domestic currency. Sources: Bloomberg; CEIC; national data. Graph 3 6

7 Why use reserve requirements? Raising RR is less likely to attract capital inflows than an increase in policy rates. RR may strengthen the effectiveness of interest rate policy. RR can be used to meet financial stability objectives. 7

8 Less likely to attract capital inflows RR tax on financial intermediation: RR rates reduce bank profits. Banks: lending rates and/or deposit rates. Deposit rates are more relevant for foreign investors. A policy rate raise increase both rates. 8

9 Strengthening the effectiveness of monetary policy To complement open market operations to achieve an interest rate target. To control rapid credit growth in less developed financial markets To restore market functioning during periods of financial stress. When policy rates are close to zero. To resolve conflicting objectives (eg economic slowdown with high inflation). 9

10 Reserve requirements and financial stability Could prevent financial imbalances by restraining credit growth. Can act countercyclically, smoothing out liquidity fluctuations in the financial system over time. Some institutional advantages in its use for financial stability: They are available to most central banks. They provide liquidity using the banking system own balance sheet (no direct costs or risks for the central bank). It s use doesn't depend on collateral from the banks. 10

11 Are reserve requirements a macroprudential tool? They could be considered part of the macroprudential toolkit if: 1. Target explicitly and specifically systemic risk. 2. Clear governance arrangements (clear definition of powers and mandate, necessary degree of operational independence and accountability). (G20,IMF,BIS (2011), pp. 7) 11

12 How effective are reserve requirements? It helped to stabilise interbank market (eg Peru ) Helped to stabilise capital flows. Resources released or retained may have helped smooth credit growth. 12

13 Effects on lending and deposit rates Reserve requirements and interest rate spreads In per cent Brazil Colombia Peru The vertical line marks the date of the Lehman Brothers bankruptcy on 15 September For Brazil, one-month deposit certificate rate; for Colombia, 90-day deposit certificate rate; for Peru, national currency time deposit rate. 2 For Brazil, SELIC target rate; for Colombia, minimum expansion rate; for Peru, reference rate. 3 For Brazil and Colombia, loan interest rate; for Peru, national currency commercial rate. 4 Effective reserve requirement ratio for domestic currency. Sources: IMF; national data. Graph 4 13

14 Effects on credit Counterfactual effects of reserve requirements on credit As a percentage of GDP 1 Brazil 2 Colombia 3 Peru 4 The vertical line marks the date of the Lehman Brothers bankruptcy on 15 September Four-quarter moving average. 2 Domestic bank credit to the private sector corresponding to national currency. Credit between October 2008 and February 2010 is simulated with counterfactual effective reserve requirement rates corresponding to the average of the last two years. 3 Domestic bank credit to the private sector is simulated with counterfactual effective remuneration-adjusted reserve requirement rates (between May 2007 and October 2008, the average of the last two years, 4.7%; between November 2008 and July 2009, the pre-change rate, 7.3%). 4 Domestic bank credit to the private sector comprises national and foreign currencies. Credit is simulated with counterfactual effective pre-change reserve requirement rates (between January and October 2008, 6% and 28.8% for national and foreign currencies, respectively; between January 2009 and June 2010, 11.5% and 33.2%, respectively). The average exchange rate for the March 2008 March 2010 period was used. Source: IMF: national data. Graph 5 14

15 Side effects of reserve requirements RR requirements impose costs: tax on the financial sector. Higher RR larger spread between lending and deposit rates increases cost of credit and reduces financial intermediation. Create an incentive for other sources of funding (eg unregulated financial sector). 15

16 Side effects of reserve requirements Reserve requirements, M2, domestic bank credit and net interest margin 2006, in per cent, logarithmic scale AR = Argentina; BR = Brazil; CL = Chile; CN = China; CO = Colombia; CZ = Czech Republic; GB = United Kingdom; HK = Hong Kong SAR; HU = Hungary; ID = Indonesia; IL = Israel; IN = India; JP = Japan; KR = Korea; MX = Mexico; MY = Malaysia; PE = Peru; PH = Philippines; PL = Poland; SA = Saudi Arabia; SG = Singapore; TH = Thailand; TR = Turkey; US = United States; VE = Venezuela; XM = euro area; ZA = South Africa. 1 Midpoint in range for Argentina, Brazil, Chile, the euro area, Indonesia, Israel, Japan, Korea, Poland, Saudi Arabia and the United States. 2 Domestic bank credit to private sector. 3 Net interest revenue/average earning assets. Sources: Mohanty and Turner (2008); IMF; Bankscope; national data; BIS calculations. Graph 6 16

17 Concluding remarks In Latin America RR have been used to: Resolve policy dilemmas associated with capital inflows. Enhance the effectiveness of monetary control or strengthen monetary policy transmission. Restore the transmission mechanism of monetary policy during periods of stress. Counter financial imbalances associated with excessive credit growth. The experience in some Latin American countries: stabilise interbank markets, moderated capital inflows, smooth credit growth. However there are trade-offs. 17

18 References Montoro, C and R Moreno (2011), The use of reserve requirements as a policy instrument in Latin America, BIS Quarterly Review, March. Montoro, C (2010), Assessing the role of reserve requirements under financial frictions, Mimeo, BIS. FSB, IMF and BIS (2011), Macroprudential policy tools and frameworks, Update to G20 Finance Ministers and Central Bank Governors, available at: 18