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Introducing optional reserve ratios in Hungary

Author

Listed:
  • Lóránt Varga

    () (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

As of the reserve maintenance period commencing in November 2010, Hungarian credit institutions will be free to decide whether to apply the previously valid 2% reserve ratio, or to apply a higher mandatory reserve ratio. Credit institutions required to hold reserves may select from reserve ratios of 2, 3, 4 and 5%, and may change their decision on a semi-annual basis. In line with the international best practice, the purpose of the MNB’s reserve requirement system is to support credit institutions' liquidity management by the monthly averaging mechanism and to thereby contribute to narrowing the gap between short-term interbank rates and the central bank central bank base rate. Indeed, with the intra-day and inter-day fluctuation of amounts held on their accounts with MNB as required reserves, credit institutions are able to manage, to a certain degree, unexpected short-term liquidity impacts they may be exposed to. Thus, banks are less dependent on overnight central bank deposits and loans, which, however suitable for managing unexpected liquidity impacts, are known to divert interbank rates from the central bank central bank base rate. It should be emphasised that in modern central banking practice – when the economy is influenced through determining the central bank central bank base rate rather than money supply – changing the reserve ratio does not impact the direction of monetary policy. That is, the raising or lowering of the reserve ratio does not generate any monetary tightening or easing within the operating frameworks of most of today's central banks. Accordingly, the sole purpose of the MNB’s latest measure is to facilitate liquidity management for the banking system, and it is not intended to influence aggregate demand and inflation via credit supply. Based on recent experience, credit institutions differ significantly from one another regarding the reserve ratio which is optimal for managing their own liquidity. While the 5% reserve ratio which was in effect until November 2008 was too high for some credit institutions, the current 2% ratio is too low for banks with relatively high payment turnover. Therefore, by introducing optional higher reserve ratios, the MNB seeks to ensure that in the future the reserve requirement system will support the liquidity management of all domestic credit institutions with appropriate efficiency, while also contributing, to the largest possible extent, to the narrowing of the gap between interbank rates and the central bank central bank base rate.

Suggested Citation

  • Lóránt Varga, 2010. "Introducing optional reserve ratios in Hungary," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 5(3), pages 57-66, October.
  • Handle: RePEc:mnb:bullet:v:5:y:2010:i:3:p:57-66
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    File URL: http://www.mnb.hu/letoltes/varga-en.pdf
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    Citations

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    Cited by:

    1. Gyula Pulay & János Máté & Ildikó Németh & Andrásné Zelei, 2013. "Budgetary Risks of Monetary Policy with Special Regard to the Debt Rule," Public Finance Quarterly, State Audit Office of Hungary, vol. 58(1), pages 11-34.
    2. László Bodnár & Miklós Luspay & Annamária Madarász, 2014. "The effect on payments of the conversion of MNB bills into deposits," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 9(2), pages 36-44, July.
    3. Gergely Fábián & Róbert Mátrai, 2012. "Unconventional central bank instruments in Hungary," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 7(2), pages 14-23, June.

    More about this item

    Keywords

    reserve requirements; reserve ratio; money supply; money multiplier; liquidity; financial crisis; interbank market;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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