Monetary Stimulus and Bank Liquidity Hoarding in an Emerging Market
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Abstract
The paper examines the impact of monetary policy on bank liquidity hoarding. Using novel measures to capture bank liquidity hoarding in Vietnam during 2007–2019, we find that banks decrease total liquidity hoarding and all three liquidity hoarding components (asset-, liability-, and off-balance sheet items) when the central bank injects more money into the economy. An interesting result appears when we document that banks hoard more liquidity in the event of lowered interest rates. Our additional analysis indicates that the extent to which bank liquidity hoarding responds to monetary policy changes is clearer in lower-risk banks.
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References
Affinito, M., Albareto, G., & Santioni, R. (2019). Purchases of sovereign debt securities by banks during the crisis: The role of balance sheet conditions. Journal of Banking and Finance, 138, 105575. https://doi.org/10.1016/j.jbankfin.2019.06.007
Altunbas, Y., Gambacorta, L., & Marques-Ibanez, D. (2010). Bank risk and monetary policy. Journal of Financial Stability, 6(3), 121–129. https://doi.org/10.1016/j.jfs.2009.07.001
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
Ashraf, B. N. (2020). Policy uncertainty and bank liquidity hoarding: International evidence. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3574193
Aspachs, O., Nier, E. W., & Tiesset, M. (2005). Liquidity, banking regulation and the macroeconomy. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.673883
Berger, A. N., & Bouwman, C. H. S. (2009). Bank liquidity creation. Review of Financial Studies, 22(9), 3779–3837. https://doi.org/10.1093/rfs/hhn104
Berger, A. N., Guedhami, O., Kim, H. H., & Li, X. (2020). Economic policy uncertainty and bank liquidity hoarding. Journal of Financial Intermediation, 49, 100893. https://doi.org/10.1016/j.jfi.2020.100893
Berger, A. N., & Sedunov, J. (2017). Bank liquidity creation and real economic output. Journal of Banking and Finance, 81, 1–19. https://doi.org/10.1016/j.jbankfin.2017.04.005
Bernanke, B. S., & Blinder, A. S. (1988). Credit, money, and aggregate demand. American Economic Review, 78, 435–439. https://doi.org/10.1016/S0197-2510(11)70055-9
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Borio, C., & Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, 8(4), 236–251. https://doi.org/10.1016/j.jfs.2011.12.003
Brei, M., Gambacorta, L., & von Peter, G. (2013). Rescue packages and bank lending. Journal of Banking and Finance, 37(2), 490–505. https://doi.org/10.1016/j.jbankfin.2012.09.010
Chakraborty, I., Goldstein, I., & MacKinlay, A. (2020). Monetary stimulus and bank lending. Journal of Financial Economics, 136(1), 189–218. https://doi.org/ 10.1016/j.jfineco.2019.09.007
Christensen, J. H. E., & Rudebusch, G. D. (2016). Modeling yields at the zero lower bound: Are shadow rates the solution? Advances in Econometrics, 35, 75–125. https://doi.org/10.1108/S0731-905320150000035003
Dang, V. D., & Huynh, J. (2020). Holdings of sovereign bonds by commercial banks in Vietnam. Cogent Economics & Finance, 8(1), 1818409. https://doi.org/10.1080/23322039.2020.1818409
Dang, V. D., & Nguyen, K. Q. B. (2021). Monetary policy, bank leverage and liquidity. International Journal of Managerial Finance, 17(4), 619–639. https://doi.org/10.1108/IJMF-06-2020-0284
Delechat, C., Henao Arbelaez, C., Muthoora, P. S., & Vtyurina, S. (2012). The determinants of banks’ liquidity buffers in Central America. IMF Working Papers No. 301, International Monetary Fund. https://doi.org/10.5089/9781616356675.001
Diamond, D. W., & Rajan, R. G. (2006). Money in a theory of banking. American Economic Review, 96(1), 30–53. https://doi.org/10.1257/000282806776157759
Diamond, D. W., & Rajan, R. G. (2011). Fear of fire sales, illiquidity seeking, and credit freezes. Quarterly Journal of Economics, 126(2), 557–591. https://doi.org/10.1093/qje/qjr012
Gale, D., & Yorulmazer, T. (2013). Liquidity hoarding. Theoretical Economics, 8(2), 291–324. https://doi.org/10.3982/te1064
Kandrac, J., & Schlusche, B. (2017). Quantitative easing and bank risk taking: Evidence from lending. In Finance and Economics Discussion Series, 2017-125. Washington: Board of Governors of the Federal Reserve System, 53 pp. https://doi.org/10.17016/feds.2017.125
Kane, E. J. (1989). The S&L insurance mess: How did it happen? The Journal of Finance, 44(5), 1444–1448. https://doi.org/10.2307/2328656
Kashyap, A. K., Rajan, R., & Stein, J. C. (2002). Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking. Journal of Finance, 57(1), 33–73. https://doi.org/10.1111/1540-6261.00415
Lambert, F., & Ueda, K. (2014). The effects of unconventional monetary policies on bank soundness. IMF Working Papers No. 152, International Monetary Fund. https://doi.org/10.5089/9781498363563.001
Lucchetta, M. (2007). What do data say about monetary policy, bank liquidity and bank risk taking? Economic Notes, 36(2), 189–203. https://doi.org/10.1111/j.1468-0300.2007.00180.x
Mamatzakis, E., & Bermpei, T. (2016). What is the effect of unconventional monetary policy on bank performance? Journal of International Money and Finance, 67, 239–263. https://doi.org/10.1016/j.jimonfin.2016.05.005
Nketcha Nana, P. V., & Samson, L. (2014). Why are banks in Africa hoarding reserves? An empirical investigation of the precautionary motive. Review of Development Finance, 4(1), 29–37. https://doi.org/10.1016/j.rdf.2014.02.001
Peydró, J. L., Polo, A., & Sette, E. (2021). Monetary policy at work: Security and credit application registers evidence. Journal of Financial Economics, 140(3), 789– 814. https://doi.org/10.1016/j.jfineco.2021.01.008
Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86–136. https://doi.org/10.1177/1536867x 0900900106
Smith, B. D. (2002). Monetary policy, banking crises, and the Friedman rule. American Economic Review, 92(2), 128–134. https://doi.org/10.1257/000282802320189122
Thakor, A. V. (2005). Do loan commitments cause overlending? Journal of Money, Credit, and Banking, 37(6), 1067–1099. https://doi.org/10.1353/mcb.2006.0009
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1), 15–29. https://doi.org/10.2307/1991374
Valencia, F. (2014). Monetary policy, bank leverage, and financial stability. Journal of Economic Dynamics and Control, 47, 20–38. https://doi.org/10.1016/j.jedc.2014.07.010
Varlik, S., & Berument, M. H. (2017). Multiple policy interest rates and economic performance in a multiple monetary-policy-tool environment. International Review of Economics and Finance, 52, 107–126. https://doi.org/10.1016/j.iref.2017.10.004
Affinito, M., Albareto, G., & Santioni, R. (2019). Purchases of sovereign debt securities by banks during the crisis: The role of balance sheet conditions. Journal of Banking and Finance, 138, 105575. https://doi.org/10.1016/j.jbankfin.2019.06.007
Altunbas, Y., Gambacorta, L., & Marques-Ibanez, D. (2010). Bank risk and monetary policy. Journal of Financial Stability, 6(3), 121–129. https://doi.org/10.1016/j.jfs.2009.07.001
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
Ashraf, B. N. (2020). Policy uncertainty and bank liquidity hoarding: International evidence. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3574193
Aspachs, O., Nier, E. W., & Tiesset, M. (2005). Liquidity, banking regulation and the macroeconomy. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.673883
Berger, A. N., & Bouwman, C. H. S. (2009). Bank liquidity creation. Review of Financial Studies, 22(9), 3779–3837. https://doi.org/10.1093/rfs/hhn104
Berger, A. N., Guedhami, O., Kim, H. H., & Li, X. (2020). Economic policy uncertainty and bank liquidity hoarding. Journal of Financial Intermediation, 49, 100893. https://doi.org/10.1016/j.jfi.2020.100893
Berger, A. N., & Sedunov, J. (2017). Bank liquidity creation and real economic output. Journal of Banking and Finance, 81, 1–19. https://doi.org/10.1016/j.jbankfin.2017.04.005
Bernanke, B. S., & Blinder, A. S. (1988). Credit, money, and aggregate demand. American Economic Review, 78, 435–439. https://doi.org/10.1016/S0197-2510(11)70055-9
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Borio, C., & Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, 8(4), 236–251. https://doi.org/10.1016/j.jfs.2011.12.003
Brei, M., Gambacorta, L., & von Peter, G. (2013). Rescue packages and bank lending. Journal of Banking and Finance, 37(2), 490–505. https://doi.org/10.1016/j.jbankfin.2012.09.010
Chakraborty, I., Goldstein, I., & MacKinlay, A. (2020). Monetary stimulus and bank lending. Journal of Financial Economics, 136(1), 189–218. https://doi.org/10.1016/j.jfineco.2019.09.007
Christensen, J. H. E., & Rudebusch, G. D. (2016). Modeling yields at the zero lower bound: Are shadow rates the solution? Advances in Econometrics, 35, 75–125. https://doi.org/10.1108/S0731-905320150000035003
Dang, V. D., & Huynh, J. (2020). Holdings of sovereign bonds by commercial banks in Vietnam. Cogent Economics & Finance, 8(1), 1818409. https://doi.org/10.1080/23322039.2020.1818409
Dang, V. D., & Nguyen, K. Q. B. (2021). Monetary policy, bank leverage and liquidity. International Journal of Managerial Finance, 17(4), 619–639. https://doi.org/10.1108/IJMF-06-2020-0284
Delechat, C., Henao Arbelaez, C., Muthoora, P. S., & Vtyurina, S. (2012). The determinants of banks’ liquidity buffers in Central America. IMF Working Papers No. 301, International Monetary Fund. https://doi.org/10.5089/9781616356675.001
Diamond, D. W., & Rajan, R. G. (2006). Money in a theory of banking. American Economic Review, 96(1), 30–53. https://doi.org/10.1257/000282806776157759
Diamond, D. W., & Rajan, R. G. (2011). Fear of fire sales, illiquidity seeking, and credit freezes. Quarterly Journal of Economics, 126(2), 557–591. https://doi.org/10.1093/qje/qjr012
Gale, D., & Yorulmazer, T. (2013). Liquidity hoarding. Theoretical Economics, 8(2), 291–324. https://doi.org/10.3982/te1064
Kandrac, J., & Schlusche, B. (2017). Quantitative easing and bank risk taking: Evidence from lending. In Finance and Economics Discussion Series, 2017-125. Washington: Board of Governors of the Federal Reserve System, 53 pp. https://doi.org/10.17016/feds.2017.125
Kane, E. J. (1989). The S&L insurance mess: How did it happen? The Journal of Finance, 44(5), 1444–1448. https://doi.org/10.2307/2328656
Kashyap, A. K., Rajan, R., & Stein, J. C. (2002). Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking. Journal of Finance, 57(1), 33–73. https://doi.org/10.1111/1540-6261.00415
Lambert, F., & Ueda, K. (2014). The effects of unconventional monetary policies on bank soundness. IMF Working Papers No. 152, International Monetary Fund. https://doi.org/10.5089/9781498363563.001
Lucchetta, M. (2007). What do data say about monetary policy, bank liquidity and bank risk taking? Economic Notes, 36(2), 189–203. https://doi.org/10.1111/j.1468-0300.2007.00180.x
Mamatzakis, E., & Bermpei, T. (2016). What is the effect of unconventional monetary policy on bank performance? Journal of International Money and Finance, 67, 239–263. https://doi.org/10.1016/j.jimonfin.2016.05.005
Nketcha Nana, P. V., & Samson, L. (2014). Why are banks in Africa hoarding reserves? An empirical investigation of the precautionary motive. Review of Development Finance, 4(1), 29–37. https://doi.org/10.1016/j.rdf.2014.02.001
Peydró, J. L., Polo, A., & Sette, E. (2021). Monetary policy at work: Security and credit application registers evidence. Journal of Financial Economics, 140(3), 789– 814. https://doi.org/10.1016/j.jfineco.2021.01.008
Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86–136. https://doi.org/10.1177/1536867x 0900900106
Smith, B. D. (2002). Monetary policy, banking crises, and the Friedman rule. American Economic Review, 92(2), 128–134. https://doi.org/10.1257/000282802320189122
Thakor, A. V. (2005). Do loan commitments cause overlending? Journal of Money, Credit, and Banking, 37(6), 1067–1099. https://doi.org/10.1353/mcb.2006.0009
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1), 15–29. https://doi.org/10.2307/1991374
Valencia, F. (2014). Monetary policy, bank leverage, and financial stability. Journal of Economic Dynamics and Control, 47, 20–38. https://doi.org/10.1016/j.jedc.2014.07.010
Varlik, S., & Berument, M. H. (2017). Multiple policy interest rates and economic performance in a multiple monetary-policy-tool environment. International Review of Economics and Finance, 52, 107–126. https://doi.org/10.1016/j.iref.2017.10.004