Are Banks Really Lazy? Evidence from Middle East and North Africa

 
Author/Editor: Simon Gray ; Philippe D Karam ; Rima Turk Ariss
 
Publication Date: May 13, 2014
 
Electronic Access: Free Full text (PDF file size is 674KB).
Use the free Adobe Acrobat Reader to view this PDF file

 
Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: We investigate whether low loan-to-deposit (LTD) ratios and high levels of reserve balances at the central bank (or holdings of government securities) are a reflection of policy-driven factors compared to commonly cited reasons of reluctance to lend or sometimes weak investment demand in uncertain environments. We examine changes to central bank (CB) balance sheet structures as well as commercial banks’ flow of funds over the period 2007–2012. First, Middle East and North Africa (MENA) CBs play an active role in view of their size that is very large with respect to their economies compared to CBs in advanced economies. Second, under exchange rate targeting, most MENA CB balance sheets are asset-driven, holding foreign exchange (FX) reserves to support the exchange rate policy and resulting in lower loan-to-deposit (LTD) ratios in the case of unsterilized increases in FX. Third, CB policy decisions seem to be accompanied by an increase in commercial bank reserve money balances, with ensuing reduction in the LTD. Finally, if governments meet their financing needs from the banking system—whether from commercial banks or by monetary financing—commercial bank balance sheets will tend to expand, resulting in lower LTD ratios. Our analysis suggests that government and CB actions may also drive the demand for and supply of credit, which are traditionally attributed to the behavior of banks and non-financial corporates and households only. The findings offer a different interpretation of changes in CB and banks’ balance sheets, with direct implications for LTD, calling to exercise caution in recommending policy action which aim at propping up LTD to ‘appropriate’ levels in an effort to reinvigorate credit following a downturn.
 
Series: Working Paper No. 14/86
Subject(s): Central banks | Middle East | North Africa | Financial intermediation | Commercial banks | Foreign exchange reserves | Bank credit | Credit demand

 
English
Publication Date: May 13, 2014
ISBN/ISSN: 9781484386460/1018-5941 Format: Paper
Stock No: WPIEA2014086 Pages: 40
Price:
US$18.00 (Academic Rate:
US$18.00 )
 
 
Please address any questions about this title to publications@imf.org