Hoarding of reserves in the banking industry: Explaining the African paradox

Abstract

We analyze the hoarding of reserves by Sub-Saharan African (SSA) banks while nonfinancial firms struggle to access credit. Using country-level data, we show that SSA bank reserves are structurally associated with insufficient credit demand. We highlight asymmetric liquidity management practices, where banks hoard reserves in low demand states, while states of excess demand are not associated to decreasing reserves. Moreover, liquid assets holdings are related to the extent of disequilibrium on credit markets, possibly reflecting a rationing behavior in states of excess demand. We do not confirm the usually alleged precautionary motive for reserves holdings based on deposit volatility. However, SSA banks, to some extent, manage their liquid assets buffers to withstand repeated episodes of deposit outflows. Our results suggest that the structural policies facilitating the access to the credit market may lead banks to displace the reserves toward the private sector, while short-term risk management concerns might be of secondary importance in explaining reserve hoarding.