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Foreign exchange intervention and the banking system balance sheet in emerging market economies

Author

Listed:
  • Blaise Gadanecz
  • Aaron Mehrotra
  • Madhusudan S Mohanty

Abstract

Large-scale forex intervention in emerging market economies (EMEs) aimed at resisting currency appreciation has major implications for the composition of banking system balance sheets. The domestic monetary consequences depend on the nature of central bank liabilities that are the counterpart of forex reserves. Even if the immediate change in bank reserves due to FX intervention is offset by the sale of securities, bank lending may still be stimulated, running counter to the aims of the monetary authority. In this paper, we empirically investigate the impact of banks’ holdings of liquid government securities, generated by such intervention, on bank credit in a panel of EMEs. We find that, for well capitalised banking systems, holdings of government and central bank paper over time lead to an expansion in their credit to the private sector. This result is confirmed at both country and bank level. The balance sheet effects of large-scale FX intervention therefore require close attention.

Suggested Citation

  • Blaise Gadanecz & Aaron Mehrotra & Madhusudan S Mohanty, 2014. "Foreign exchange intervention and the banking system balance sheet in emerging market economies," BIS Working Papers 445, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:445
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    References listed on IDEAS

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    4. Andrew Filardo & Madhusudan Mohanty & Ramon Moreno, 2012. "Central bank and government debt management: issues for monetary policy," BIS Papers chapters,in: Bank for International Settlements (ed.), Fiscal policy, public debt and monetary policy in emerging market economies, volume 67, pages 51-71 Bank for International Settlements.
    5. Bassett, William F. & Chosak, Mary Beth & Driscoll, John C. & Zakrajšek, Egon, 2014. "Changes in bank lending standards and the macroeconomy," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 23-40.
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    9. Gustavo Adler & Camilo E Tovar Mora, 2011. "Foreign Exchange Intervention; A Shield Against Appreciation Winds?," IMF Working Papers 11/165, International Monetary Fund.
    10. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-439, May.
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    Cited by:

    1. Ken Miyajima & Madhusudan Mohanty & James Yetman, 2014. "Spillovers of US unconventional monetary policy to Asia: the role of long-term interest rates," BIS Working Papers 478, Bank for International Settlements.
    2. Koray Alper & Mahir Binici & Selva Demiralp & Hakan Kara & Pinar Ozlu, 2014. "Reserve Requirements, Liquidity Risk and Credit Growth," Working Papers 1424, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    3. Filardo, Andrew & Genberg, Hans & Hofmann, Boris, 2016. "Monetary analysis and the global financial cycle: An Asian central bank perspective," Journal of Asian Economics, Elsevier, vol. 46(C), pages 1-16.
    4. Philip Turner, 2014. "The exit from non-conventional monetary policy: what challenges?," BIS Working Papers 448, Bank for International Settlements.
    5. Ken Kuttner & James Yetman, 2016. "A comparison of liquidity management tools in seven Asian economies," BIS Papers chapters,in: Bank for International Settlements (ed.), Expanding the boundaries of monetary policy in Asia and the Pacific, volume 88, pages 33-58 Bank for International Settlements.
    6. Philip Turner, 2016. "External shocks, the exchange rate and macroprudential policy," BIS Papers chapters,in: Bank for International Settlements (ed.), Macroprudential policy, volume 86, pages 57-62 Bank for International Settlements.

    More about this item

    Keywords

    bank lending; sterilised intervention; foreign exchange reserves; central bank securities; emerging market economies;

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