Dynamic interactions of bank assets in two foreign currency constrained economies

This study explores how shocks in the foreign exchange market influence the allocation of commercial bank assets. A consistent pattern of asset allocation was discovered for Guyanese and Jamaican commercial banks. A positive one standard deviation shock (a surplus) in the foreign exchange market results in significantly greater investments in foreign assets relative to loans to the domestic private sector. The one standard deviation shock also results in a decrease in non-remunerated excess reserves; thus signalling that the excess cash are more likely to be invested into foreign assets rather than domestic currency loans when there is a surplus of foreign currencies. The same unit shock results in a foreign exchange rate depreciation in the contemporaneous time period. That the respective currencies depreciate when there is a surplus could indicate traders hoard the surplus initially for profit taking.