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Monetary Policy and Banks’ Investment Portfolio

Author

Listed:
  • Sajjad Zaheer

    (State Bank of Pakistan)

  • Muhammad Amin Khan Lodhi

    (State Bank of Pakistan)

Abstract

This working paper studies the relationship between banks’ investment portfolio and the monetary policy using disaggregated quarterly data of individual banks in Pakistan from June 2007 to June 2022. The study reveals that an expansionary stance of monetary policy improves the investment to asset ratio of the banks. However, following the constraints on government borrowing from the SBP in 2019, the banks’ investment portfolio has grown, despite monetary tightening. The paper also finds that banks’ investments increase with both the size of the bank and the non-performing loans growth, as banks rebalance their portfolios toward safer assets. Moreover, liquidity support by the SBP, through open market operations, has a positive impact on the banks’ investments. Further, with the rise in inflation, the investment to asset ratio of the banks rises to protect the eroding value of cash. Conversely, the investment portfolio of the banks decreases with the increase in advances and the government borrowing from the SBP.

Suggested Citation

  • Sajjad Zaheer & Muhammad Amin Khan Lodhi, 2025. "Monetary Policy and Banks’ Investment Portfolio," SBP Working Paper Series 119, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:119
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    File URL: https://www.sbp.org.pk/publications/wpapers/2025/119.pdf
    File Function: First version, 2025
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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