LIQUIDITY LABYRINTHS: DECODING THE BANKING LIQUIDITY PARADOX VIA AN OPTIMAL RESERVE FRAMEWORK
Abstract
The banking liquidity paradox, characterized by excessively liquid banks despite the insufficient supply of business loans, is a persistent concern in Sub-Saharan Africa (SSA). This paradox stems from both involuntary and voluntary factors influencing commercial banks' excess reserve holdings. Involuntary causes include substantial foreign currency inflows resulting from exports of commodities like oil, coffee, and cocoa. These export revenues significantly boost bank liquidity, a phenomenon observed in regions like CEMAC. Additionally, factors such as accumulating foreign exchange reserves to maintain currency stability in fixed parity monetary zones, remittances from migrants, official development aid, and debt relief initiatives like the Heavily Indebted Poor Countries Initiative (HIPC) contribute to increased bank liquidity. Furthermore, the repatriation of capital after currency devaluation and the establishment of regional stock exchanges amplify capital inflows. Voluntary factors also play a role, including restrictions on central banks financing national treasuries, as well as monetary policies associated with mandatory reserves. This article delves into the intricate web of involuntary and voluntary influences driving the banking liquidity paradox in SSA, shedding light on the complexities of the region's financial landscape.
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Banking Liquidity Paradox, Sub-Saharan Africa (Ssa),, Excess Reserves, Capital InflowsDownloads
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Copyright (c) 2023 Omer Kouakou
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