The role of macroprudential policy in reducing liquidity risk in Egypt

Elroukh, Ahmed Wassal; Elsharkawy, Rania Anis

doi:10.21608/jocu.2023.188576.1251

The role of macroprudential policy in reducing liquidity risk in Egypt

نوع المستند : مقالات سیاسیة واقتصادیة

المؤلفون

Department of Economics, Faculty of Economic Studies and Political Science, Alexandria University

10.21608/jocu.2023.188576.1251

المستخلص

Macroprudential policy is a relatively new approach to stabilize the financial system and reduce systemic risk that could arise over the business cycle due to credit and liquidity risk. The appropriate instruments of the macroprudential policy to be adopted by policymakers depend upon the source of the systemic risk and the country under study. This paper is the first attempt to identify appropriate financial indicators that could be utilized as effective instruments to lessen liquidity risk, measured by loans-to-deposit ratio, in the Egyptian financial system. The financial indicators that are included in our analysis are loan-to-value ratio, debt-to-income ratio, foreign-currency-lending ratio, currency mismatch, and required reserve ratio. We empirically accomplish this via estimating a Vector Autoregressive (VAR) Model using time series data from 2004Q3 to 2021Q1. The findings of this paper suggest the following. An increase in the debt-to-income ratio or currency mismatch ratio will temporarily increase liquidity risk in the Egyptian banking system. Also, an increase in the foreign-currency-lending ratio will permanently increase liquidity risk. These findings suggest to policymakers that caps on loan-to-value, currency mismatch, and foreign-currency lending ratios could be effective in reducing liquidity risk in the Egyptian financial system.

الكلمات الرئيسية