The banking sector tends to be procyclical with the rise and fall of the economy. When the economy is well, banks will expand and increase risk-taking behavior.
he limited room for a policy rate cut does not dampen the spirit of Bank Indonesia (BI) to loosen its monetary policy. The central bank’s board of governors’ meeting in the middle of January opened the 2018 sheet by relaxing some macro prudential policies.
First, BI refined the primary reserve requirement (RR). The RR in rupiah for commercial banks that had originally been set at 5 percent of dailyfixed third-party funds with 1.5 percent average within the two weeks as maintenance period was reduced to 4.5 percent and 2 percent, respectively.
The difference of 0.5 percent at least adds liquidity of Rp 20 trillion (US$1.5 billion) to the banking system. The increase in liquidity is expected to improve the capacity of loan disbursement, targeted to grow 12 percent within this year. Therefore, the maneuver to realize the target of economic growth of 5.4 percent becomes lighter.
Second, BI converted the loanto-funding ratio (LFR) rule for conventional commercial banks into Macroprudential Intermediation Ratio (MIR). With the change, banks can use more of their funds to purchase securities.
With this rule, BI implicitly encourages a bank to use the increase in liquidity resulting from the eased RR to buy securities. In turn, corporations will be encouraged to issue commercial papers. The financial market deepening is another important goal that BI will achieve.
Third, BI introduced the Macroprudential Liquidity Buffer (MLB) as secondary RR. The MLB is set at 4 percent of deposit, allowing 2 percent of a deposit to be used as repo to BI under certain conditions to fulfill a bank’s liquidity needs. This strategy closely relates to the behavior of banks.
The banking sector tends to be procyclical with the rise and fall of the economy. When the economy is well, banks will expand and increase risk-taking behavior. In contrast, when the economy is slow, banks are inclined to withhold expansion by retaining credit disbursement. Therefore, the MLB is aimed at maintaining the stability of banking’s liquid assets.
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