Análisis y evaluación del riesgo

This section will focus on one of the "first type" repressions (see section 2.1.1.), namely on obligatory reserve requirements. The reason is that the effects of these reserves can to great extent be quantified, and compared with those in other non-EE countries. Additionally, it can argued that by easing the reserve regime as well as other financial repression instruments, EE financial regulators might allow their domestic banks to became more competitive as well as dispose of some of their retained funds to better prepare for facing foreign competition. However, in most cases budgetary consideration has a clear priority over long-term, pro-competitive reasoning. Moreover, if we assume that implicit revenue from reserve requirements was implicitly used to recapitalise the banking system, the benefits of reserves were unevenly distributed and most of them returned to the state-owned part of the system.

2.2.1. Reserve requirements - theoretical background

Reserve requirements can be defined as regulations which force banks to retain a strictly defined proportion of the value of liabilities (or sometimes assets) on a non-interest or low-interest bearing account at the central bank. The core of this regulation is the level of these requirements given

by a percentage of specified groups of liabilities (in most cases deposits) which have to be placed in the central bank. This percentage can vary for different groups of assets and most often is set down with respect to the value of the term and demand deposits.

Authorities argue that reserve requirements play an important role in preventing of systemic risk as well as In conducting monetary policy. Indeed, the reserve requirements are a powerfull instrument of monetary rather than prudential control in EE countries, especially due to the low level of financial market developement and thus non-existence of more sophisticated instruments. However, Kantas and Greenbaum (1982) showed that the predictability of money aggregates is enhanced by reserve requirements only if there are no financial innovations induced by requirements. They point out that the implementation of monetary policy might be better served by interest payments on central bank deposits rather than legal reserve requirements. Actually, due to their low profitability (or even negative profitability in the case of the lack of compensation for inflation) reserve requirements might be regarded as having been established for the purpose of obtaining a cheap source of financing for the central bank and, through it, for the state budget. Therefore, they can be viewed as an implicit tax on banking activities. As Hoschka (1993) argues;

The benefits of reserve requirement are not clear. While they are mostly regarded as a monetary policy instrument, countries are able to pursue effective monetary policy by other means (..). Primarily, reserve requirements constitute an important source of revenue for the government and thus repiace other forms of taxes. (p.56)

Obviously, in some cases, the existence of such reserves can prevent some problems for the banks, but it can only do so when easy access to these reserves for the banks in trouble is granted. Reserves can be only a

short-run, additional source of help as they are usually not enough in themselves to outweigh heavy disturbances in banks' liquidity. Moreover, it can be argued, as in Galbraith and Rymes (1993), that the central bank can better influence banks by properly setting overdraft rates within the clearing system. As with other financial repression instruments, there is a close linkage between the level of independence of the central bank and the scale of application of these instruments. More independent central banks shift towards regulations that are less-repressive and aimed at the stability of the banking system, rather than focused on the increase of budget revenue. The role of reserve requirements in conducting monetary policy was in the past few years reduced, and replaced by other, more sophisticated instruments (i.e. open-market operations). However, in EE countries with underdeveloped financial markets, reserve requirements still have an important role in conducting monetary policy. But in next sections I will focus on quasi-fiscal effects of reserve requirements, which seems to be generaly neglected in analysis.

2.2.2. The model

In order to show how reserve requirements interact with other instruments of banking activity, a special version of a simple Klein-Monti model will be described (similar models are presented in: Repullo, 1991; Molho, 1992). This model assumes the existence of the three types of agents in the economy: consumers, firms and banks. It also includes the existence of a government which issues bonds to cover the public debt. There are three different interest rates in the economy:

i(j - deposit interest rate (iQ>0) i^-loan interest rate (iL>0) ig - bond interest rate (ig>0)

Consumers have a deposit supply function Dg(iQ,ig) such as: > 0 ( condition 1 )

Ol£)

< 0 ( condition 2 ) OJb

and a bond demand function such as: ^ < 0 ( condition 3 )

Oj£)

—^ > 0 ( condition 4 )

àiB

Firms display a loan demand function such as: ^ < 0 ( condition 5 )

Banks are the local monopolist and they are setting and /^. The representative bank faces a deposit supply function Ds(i[),ig) and a loan demand function Lj(iJ. Additionally the bank is a subject to reserve requirements and has to hold fraction k of its deposits in a form of cash^\ The crucial balance sheet equation balancing assets with liabilities for the representative bank is given by:

L + B + R = D + E (2.1)

where: L is the value of loans granted by the bank B is a value of bonds in the bank's portfolio

R is a value of reserves requirements such as R = kD D is a value of deposits located within bank

E is the value of bank's own funds

As was mentioned, normally the banks hold their reserves in the central bank. For simplicity we can assume that cash is the equivalent o f the deposit within the central bank. Actually in some countries (i.e. Poland ) the average level o f cash in a treasury can be deducted from reserve requirements.

The bank Is maximizing its profits^ n subject to the given above balance sheet equation (2.1):

n = f(M,X) (2.2)

where M is a vector of market structure variables and X is a vector of firm-specific variables. Particularly, in short term M is assumed to be fixed and:

n = IlL + igB - ipD - Z + M (2.3)

where Z represents total operating expenses which are also assumed to be fixed. Substituting B from (2.1) into (2.3) and assuming that R = kD, the objective function looks as follows:

n = (II- ie)L + [ (l-k)ig - iJD + i^E - Z + M (2.4)

The first - order conditions for a maximum are:

S = g ( ( l - A : ) / . - / z > ) - Z ) = (2.5)

= + (2.6)

Solving for and we get:

^ Some versions o f this model assume die maximisation o f the value o f total assets (Molho, 1992), but this does not have any influence on the results.

where:

SD i p ,