We study excess liquidity in the banking system using data for India during 2005–2020. We apply Autoregressive Distributed Lag model and panel regressions to identify the factors determining excess liquidity at both aggregate and bank levels. We find that required reserves, private sector credit, and government securities held by banks have negative, positive, and negative effects on excess liquidity, respectively. Other factors such as exchange rate and inter-bank call rate have varying effects at the two levels. Our results suggest that banks can chalk out mechanisms to optimize their liquidity management and avoid the cost of excess liquidity.
AcharyaV., & NaqviH. (2012). The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle. Journal of Financial Economics, 106(2), 349–366. 10.1016/j.jfineco.2012.05.014
2.
AgénorP. R., & El AynaouiK. E. (2010). Excess liquidity, bank pricing rules, and monetary policy. Journal of Banking and Finance, 34(5), 923–933. 10.1016/j.jbankfin.2009.10.003
3.
AgénorP. R., AizenmanJ., & HoffmaisterA. W. (2004). The credit crunch in East Asia: What can bank excess liquid assets tell us?Journal of International Money and Finance, 23(1), 27–49. 10.1016/j.jimonfin.2003.08.008
4.
DarvasZ., & PichlerD. (2018). Excess liquidity and bank lending risks in the Euro area [Study for the Committee on Economic and Monetary Affairs of the European Parliament, Luxembourg] (No. 2018/16). https://www.europarl.europa.eu/RegData/etudes/STUD/2018/626069/IPOL_STU(2018)626069_EN.pdf
5.
DemiralpS., EisenschmidtJ., & VlassopoulosT. (2021). Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the Euro area. European Economic Review, 136. https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf
6.
GanleyJ. (2002). Surplus liquidity: Implications for central banks. Centre for Central Banking Studies, Bank of England.
7.
HasanovicE., & LaticT. (2017). The determinants of excess liquidity in the banking sector of Bosnia and Herzegovina [No. 11–2,017]. Graduate Institute of International and Development Studies Working Paper. https://www.econstor.eu/bitstream/10419/184714/1/HEIDWP11-2017.pdf
8.
JacobC., & LukoseP. J. J. (2018). Institutional ownership and dividend payout in emerging markets: Evidence from India. Journal of Emerging Market Finance, 17(Suppl 1), S54–S82. 10.1177/0972652717751538
9.
KaminskyG. L., & ReinhartC. M. (1998). Financial crises in Asia and Latin America: Then and now. American Economic Review, 88(2), 444–448.
10.
KhemrajT. (2007). Monetary policy and excess liquidity: The case of Guyana. Social and Economic Studies, 56(3), 101–127.
11.
MohantyM. S., SchnabelG., & Garcia-LunaP. (2006). Banks and aggregate credit: What is new?https://www.bis.org/publ/bppdf/bispap28b.pdf
12.
MoussaM. A. B. (2015). The determinants of bank liquidity: Case of Tunisia. International Journal of Economics and Financial Issues, 5(1), 249–259.
13.
NguyenV. H. T., & BoatengA. (2015). An analysis of involuntary excess reserves, monetary policy and risk-taking behaviour of Chinese banks. International Review of Financial Analysis, 37, 63–72. 10.1016/j.irfa.2014.11.013
14.
NissankeM., & AryeeteyE. (1998). Financial integration and development: Liberalization and reforms in sub-Saharan Africa. Routledge.
15.
NwakanmaP. C., & ScI. M. M. (2014). Determinants of excess liquidity: The Nigerian experience. International Business Research, 7(6), 174. 10.5539/ibr.v7n6p174
16.
OdhiamboN. M. (2009). Energy consumption and economic growth nexus in Tanzania: An ARDL bounds testing approach. Energy Policy, 37(2), 617–622. 10.1016/j.enpol.2008.09.077
17.
OdonkorT. A., OseiB. A., & SjöB. (2016). Risk-taking, ownership and excess reserves in the Ghanaian Banking system. Journal of Emerging Market Finance, 15(2), 147–168. 10.1177/0972652716645890
18.
OmerM., De HaanJ., & ScholtensB. (2015). An empirical analysis of excess interbank liquidity: A case study of Pakistan. Applied Economics, 47(44), 4754–4776. 10.1080/00036846.2015.1034842
19.
PesaranM. H. (2015). Time series and panel data econometrics. Oxford University Press.
20.
PontesG., & Sol MurtaF. (2012). The determinants of the bank’s excess liquidity and the credit crisis: The case of Cape Verde. Faculdade de Economia da Universidade de Coimbra.
21.
SaxegaardM. (2006). Excess liquidity and the effectiveness of monetary policy: Evidence from Sub-Saharan Africa (no. 6–115). International Monetary Fund.
22.
UkejeS. A., & AmanzeD. (2015). Sources and impact of excess liquidity on monetary policy in Nigeria. Economic and Financial Review, 53(2), 4.
23.
WyploszC. (2003). Briefing notes to the Committee for Economic and Monetary Affairs of the European Parliament. Europe, 15, 20.
24.
ZhangC., & PangH. (2008). Excess liquidity and inflation dynamics in China: 1997–2007. China and World Economy, 16(4), 1–15. https://onlinelibrary.wiley.com/doi/10.1111/j.1749-124X.2008.00118.x
