Unremunerated Reserve Requirement Research Articles

How the unremunerated reserve requirement by the Bank of Thailand affects IPO underpricing and the long-run performance of IPOs

Purpose The purpose of this paper is to investigate the characteristics of the Initial Public Offering (IPO) market, IPO underpricing and the long-run performance of IPOs and to find out the ex ante difference in the market structure between the pre-, during and post-periods of the Unremunerated Reserve Requirement (URR) at the 30 per cent rate. Design/methodology/approach The sample is a total of 245 IPOs listed on the Stock Exchange of Thailand (SET) and the Market for Alternative Investment (mai), during the period 2001-2012. The explanatory variables consist of the age of the firm, the offer size, the time-lag between the IPO date and the first trading date, the proportion of shares owned by the government and the IPO subscription rates by foreign and institutional investors. In further analysis, the authors adopt a two-stage least squares approach to derive unbiased estimates of the relationship between government ownership, IPO underpricing and firm quality. Findings We find the ex ante uncertainty and earning management partially explain the IPO underpricing phenomenon in the Thai IPO market. Our findings support the impresario hypothesis shown by the negative relation between underpricing and the three-year after-market. In addition, the 30 per cent URR imposition by the Thai Central Bank promptly reduced the number of IPO issues and the proportion of foreigners and institutions subscribing to IPOs. However, it was able to enhance the degrees of IPO underpricing and the long-run performance of IPOs in Thailand. Practical implications The results presented in this paper may be, therefore, useful for investors, security analysts, companies and regulators in many other emerging markets beyond Thailand. Given the results from the over-performance of IPOs in the post-URR period, investors may do better holding Thai IPOs for a long period with a likelihood of gaining a higher return. Originality/value This paper contributes to the literature concerning IPOs – in that we have considered two stock markets, namely, SET and mai. Furthermore, unique data such as the government ownership and proportion of IPOs subscribed by foreign and institutional investors are taken into consideration in our research model. To the best of our knowledge, for the first time in the Thai IPO market, the effect of the 30 per cent URR on IPO underpricing and the performance of IPOs in the long-run has been closely examined.

The spillover effects of unremunerated reserve requirements: Evidence from Thailand

We examine the spillover effects of the unremunerated reserve requirement (URR), which had been implemented in Thailand during 2006–2007, on stock returns through the Thai baht (THB) exchange rate against the euro (EUR) and the Japanese yen (JPY). Based on a sample of 270 firms listed on the Stock Exchange of Thailand (SET), we find that the imposition of the URR appears to affect the first- and second-moment exchange rate exposure to the EUR and the JPY of some firms, but the evidence does not strongly support the notion that there are spillover effects of the URR on exchange rate exposure.

Central Bank Financial Strength in Central America and the Dominican Republic

This paper examines the financial strength of central banks in Central America and the Dominican Republic (CADR). Some central banks are working off the effects of intervention in distressed financial institutions during the 1990’s and early 2000’s. Their net income has improved since then owing to lower interest rates, a reduction in interest bearing debt, and recapitalization transfers. Claims on the government have fallen, but remain high and are typically reimbursed at below-market rates, and capital is negative when adjusting for this. Capital is sufficient to back a low inflation target given that the income position is supported by unremunerated reserve requirements. Capital is likely to increase over time, but only gradually, leaving countries vulnerable to macroeconomic risks. The capacity of CADR central banks to engage in macroeconomic stabilization would benefit from increased emphasis on low inflation as the primary objective of monetary policy and a stronger commitment by governments to recapitalization.

Central Bank Financial Strength in Central America and the Dominican Republic

This paper examines the financial strength of central banks in Central America and the Dominican Republic (CADR). Some central banks are working off the effects of intervention in distressed financial institutions during the 1990’s and early 2000’s. Their net income has improved since then owing to lower interest rates, a reduction in interest bearing debt, and recapitalization transfers. Claims on the government have fallen, but remain high and are typically reimbursed at below-market rates, and capital is negative when adjusting for this. Capital is sufficient to back a low inflation target given that the income position is supported by unremunerated reserve requirements. Capital is likely to increase over time, but only gradually, leaving countries vulnerable to macroeconomic risks. The capacity of CADR central banks to engage in macroeconomic stabilization would benefit from increased emphasis on low inflation as the primary objective of monetary policy and a stronger commitment by governments to recapitalization.

The effectiveness of capital controls: evidence from Colombia and Thailand

In the run up to the financial crisis of 2007–2009 many developing nations were subject to massive inflows of capital, capital that their financial systems found difficult to absorb. One of a number of policy options to respond to such inflows is unremunerated reserve requirements (URR). Two countries, Colombia and Thailand, deployed URR in the second half of the decade. This paper analyses the effectiveness of the URR in those two instances. We find that URRs were modestly successful in Colombia and Thailand. In Colombia, the controls were able stem an asset bubble in the stock market. In Thailand, the URR reduced the overall volume of flows, and the announcement of the URR caused a sharp drop in asset prices. However, some of the other goals of capital controls were not fulfilled. The results in this paper demonstrate that there is still a role for capital controls in the twenty-first century, but such controls should be more sophisticated than in years past.

The Spillover Effects of Unremunerated Reserve Requirements: Evidence from Thailand

We examine the spillover effects of the unremunerated reserve requirement (URR), which had been implemented in Thailand during 2006–2007, on stock returns through the Thai baht (THB) exchange rate against the euro (EUR) and the Japanese yen (JPY). Based on a sample of 270 firms listed on the Stock Exchange of Thailand (SET), we find that the imposition of the URR appears to affect the first- and second-moment exchange rate exposure to the EUR and the JPY of some firms, but the evidence does not strongly support the notion that there are spillover effects of the URR on exchange rate exposure.

Testing the Effectiveness of Market‐Based Controls: Evidence From the Experience of Japan With Short‐Term Capital Flows in the 1970s

AbstractThis paper tests the effectiveness of marginal reserve requirements employed by Japan in the 1970s to influence short‐term capital flows. We thereby contribute to the ongoing debate on the use of capital controls—market‐based ones in particular. While the case for using market‐based controls relies on the mixed evidence from the experience of Chile with unremunerated reserve requirements, testing for their effectiveness is hampered by the endogeneity of such a measure, which is typically imposed or intensified when inflows surge. We address this problem in the Japanese context by applying the method of propensity score matching, and find that an increase in marginal reserve requirements modestly reduced short‐term capital inflows through non‐resident free‐yen accounts. The impact was not statistically significant, however, implying that the price elasticity of short‐term capital flows was likely small. We conclude that market‐based controls must be nearly prohibitive, perhaps combined with administrative measures, to be effective in a meaningful way.

Unremunerated reserve requirements, exchange rate volatility, and firm value

In this paper we investigate whether the imposition of the unremunerated reserve requirement on capital inflows influences exchange rate volatility and stock prices. Our analysis shows that exchange rate volatility of the Thai baht against four major currencies—the US dollar, the British pound, the euro, and the Japanese yen—appears to be larger during the period of the imposition of the unremunerated reserve requirement in 2006–2007. Using a data set of publicly traded firms in Thailand, we find that the exposure of firms to exchange rate volatility appears to change during the unremunerated reserve requirement period relative to the pre- and post-unremunerated reserve requirement period. We also find that the effect of exchange rate volatility during the unremunerated reserve requirement period on stock returns is stronger for some firms than others. The results suggest that the unremunerated reserve requirement affects asset prices, through larger exchange rate volatility and through changes in exposure of firms to exchange rate volatility.

The perils of a central bank's capital control: How substantial is the effect on firm value?

In this paper we examine the cross-sectional effects of the announcement of the imposition of the unremunerated reserve requirement (URR) in Thailand on stock prices. We show that there are negative abnormal returns following the announcement of the imposition of the URR, and that the effect of the imposition of the URR on stock prices seems to be relatively short lived. Our tests show that firm size, financial risk, and firm profitability have no effect on abnormal returns on the first-trading day following the URR announcement, but the effects of firm size, firm profitability and financial risk on abnormal returns become more evident in later days. We also find some evidence to suggest that there is no industrial effect on abnormal returns around the URR announcement.

A reexamination of capital controls’ effectiveness: Recent experience of Thailand

This paper investigates the impact of the Unremunerated Reserve Requirement (URR) measure recently imposed in Thailand by applying three quantitative techniques of Edison and Reinhart (2001). We find that the URR measure was not completely effective in stabilizing the exchange rate, which was its original purpose. Although the THB onshore rate became more stable and less interdependent after the implementation of the URR, it was not completely isolated from other Asian currencies. Meanwhile, the URR measure was successful in reducing the total of net capital inflow and altering its composition toward preferable long-term investment, but it was unsuccessful in reducing short-term private external debt. In addition, since foreign equity investment was exempted from the measure, short-term capital inflows were forced to go mainly through the stock market; consequently, the URR had a limited impact on the equity market. Lastly, we find some side-effects of the measure, namely a wider spread between onshore and offshore rates, a bearish market sentiment, an obstacle to the debt market development, and a negative effect on the credibility of the Monetary Authority.

Capital Account Restrictions, Exchange Rate Volatility, and Firm Value

Building upon a data set of publicly traded firms in Thailand, we find that the exposure of firms to exchange rate volatility appears to change during the period of capital account restrictions (in the form of the un-remunerated reserve requirement on capital inflows) between 2006-07. We also find that exchange rate volatility of Thai baht against four major currencies- the US dollar, the British pound, the euro, and the Japanese yen- appears to be greater during the implementation period of capital account restrictions. Our results also show that stock returns for some firms are greater/less sensitive to exchange rate volatility during the capital account restrictions period, suggesting that the restrictions on capital inflows are beneficial to some firms while have a detrimental effect on other firms.

Microeconomic Effects of Capital Controls: The Chilean Experience During the 1990s

This paper studies the experience with the use of capital controls in Chile during the 1990s. Rather than revisiting previous studies, it complements previous research by providing, for the first time, empirical evidence on some of the microeconomic effects of capital controls, in particular, the unremunerated reserve requirement (URR). By looking at financial statements for a group of 73 Chilean firms during 1986-2001, the paper attempts to identify the effects of the URR on the firms' costs and ways of financing. Chilean firms are grouped by economic sector, size and access to international capital markets. Results show that the effects of the URR are firm specific; for instance, there are striking differences in the response to the URR among firms of different size and those with or without access to international capital markets.

The Perils of a Central Bank’s Capital Control: How Substantial is the Effect on Firm Value?

In this paper we examine the cross-sectional effects of the announcement of the imposition of the unremunerated reserve requirement (URR) in Thailand on stock prices. We show that there are negative abnormal returns following the announcement of the imposition of the URR, and that the effect of the imposition of the URR on stock prices seems to be relatively short lived. Our tests show that firm size, financial risk, and firm profitability have no effect on abnormal returns on the first-trading day following the URR announcement, but the effects of firm size, firm profitability and financial risk on abnormal returns become more evident in later days. We also find some evidence to suggest that there is no industrial effect on abnormal returns around the URR announcement.

Dealing with Capital Flows: Thailand in 2006

This case was written as an exam case for first-year course, “Global Economies and Markets.” It is written as a comprehensive case that examines the policy choices facing a small open economy in an increasingly globalizing world. It can be used in a course on open economy macroeconomics or on international finance. Late in the day on December 18, 2006, the Bank of Thailand (BOT), the country's central bank, announced that effective the next day it would impose a 30% unremunerated reserve requirement (URR) on short-term capital inflows. The capital control measure required financial institutions to withhold in reserve accounts 30% of capital inflows that exceeded USD 20,000 for a period of one year. The restriction on capital inflows represented a significant escalation of Thailand's battle to stop the appreciation of its official currency, the baht (THB). On December 19, the Stock Exchange of Thailand (SET) composite index dropped by a record 14.84%, wiping out THB800 billion or USD22 billion of market capitalization. The sell-off affected regional stock markets as well, with Jakarta (Indonesia) down 2.85%; Kuala Lumpur (Malaysia) down 2%; and Singapore down 2.23%. In the foreign exchange market, the baht lost 2% of its value against the U.S. dollar to settle at about THB36 to the dollar. The large foreign capital inflows and the resulting appreciation of the Thai baht had culminated in the decision by the interim government to impose capital controls. The dramatic reactions in the financial markets, however, had prompted Thai policymakers to reevaluate the situation and to consider policy options for 2007.

Dealing with Capital Flows: Thailand in 2006

This comprehensive case examines the policy choices facing a small open economy in an increasingly globalizing world. It can be used in a course on open economy macroeconomics or on international finance. (It was originally written as an exam case for first-year course, Global Economies and Markets).Late in the day on December 18, 2006, the Bank of Thailand (BOT), the countrys central bank, announced that effective the next day it would impose a 30% unremunerated reserve requirement (URR) on short-term capital inflows. The capital control measure required financial institutions to withhold in reserve accounts 30% of capital inflows that exceeded USD20,000 for a period of one year. The restriction on capital inflows represented a significant escalation of Thailands battle to stop the appreciation of its official currency, the baht (THB). On December 19, the Stock Exchange of Thailand (SET) composite index droped by a record 14.84%, wiping out THB800 billion or USD22 billion of market capitalization. The sell-off affected regional stock markets as well, with Jakarta (Indonesia) down 2.85%; Kuala Lumpur (Malaysia) down 2%; and Singapore down 2.23%. In the foreign exchange market, the baht lost 2% of its value against the U.S. dollar to settle at about THB36 to the dollar. The large foreign capital inflows and the resulting appreciation of the Thai baht had culminated in the decision by the interim government to impose capital controls. The dramatic reactions in the financial markets, however, prompted Thai policymakers to reevaluate the situation and to consider policy options for 2007.

Impact of Monetary Policy on Banks' Growth Path

With the liberalization of balance of payments, the monetary policy scenario in India underwent a sea change. While the merits and demerits of capital account liberalization have been debated, it is still not clear as to what extent the Indian economy has integrated with the global economy. There are basically two choices: either integrating with the international economy at a measured and orderly pace, or letting the world integrate with us in a disorderly manner on terms dictated by the international economy. The objective of macroeconomic management is to tailor the policies so as to maximize the gains of global integration while minimizing the adverse features of globalization. This article captures the dilemmas and challenges of formulating a favourable monetary policy and studies and projects the implications of the changing dimensions of monetary policy on the different parameters determining the banks� growth path. In the absence of RBI�s intervention, persistent capital inflows into the country could result in an unrestrained monetary expansion and a real effective exchange rate (REER) appreciation which in turn is likely to end up in a crisis. RBI has used a combination of the market stabilization scheme (MSS), the reverse repo, and the cash reserve ratio (CRR) to tackle the problem of excess liquidity. As CRR is considered a blunt instrument, RBI is suggested to use incremental cash reserve ratio to immobilize the excess liquidity from where it is lodged. In an extreme situation of excessive capital inflows, the author suggests the use of unremunerated reserve requirements on fresh inflows by foreign institutional investors. For the banks, large capital outflows could lead to a more difficult situation as pumping in of created money to restore liquidity could trigger further capital outflows. Remedial measures such as raising of interest rates, tightening of liquidity, and depreciation of exchange rate will have to be implemented in a non-disruptive manner so as to ensure that the economy does not go into a state of panic. For formulating a viable monetary policy, what is most important is to set objectives in such a way that there is a clear agreement between the government and the RBI. The present structure of the banking system is not conducive to the development of a strong and vibrant financial structure. There have been repeated recommendations to reduce government holding in public sector banks because of the government�s inability or reluctance to provide more capital to these banks. In the overall rapidly changing globalized scenario, the banks cannot remain isolated; they too need to keep pace and should therefore join the bandwagon.

Central Banks and Capital Flows

Sudden capital outflows were at the heart of the 1997-98 Asian crisis. Ten years later, capital flows are back on the policy agenda, but in a very different context. The countries of East Asia are now getting more inflows than they can effectively absorb and the upward pressure on exchange rates is unwelcome. These capital inflows reflect an ongoing structural disequilibrium: foreign capital will be attracted by the higher returns and the prospect of currency appreciation. In this environment, the exchange rate will be poorly anchored by fundamentals, which threatens the stability of the financial system. There is a range of possible policy responses. “Sand in the wheels,” hedging, fiscal surpluses, current account surpluses, intervention using foreign exchange reserves, domestic taxes (both on foreign income and on capital gains), taxes on inflows (unremunerated reserve requirements), better bankruptcy arrangements, and stronger prudential measures may make some contribution, but each will be limited by institutional constraints and administrative capabilities. JEL Classification: F21, F31, F32, F36, G15, G28 ADBI Discussion Paper 87 Stephen Grenville

The Welfare Cost of Capital Controls

This paper examines the macroeconomic implications of capital controls that limit international financial flows to emerging economies. Using extended loanable funds analysis, it first demonstrates how perfect capital mobility contributes to development, contrary to a prevalent view that international borrowing is inimical to the economic welfare of developing economies. As a corollary, the analysis then shows that capital controls, irrespective of form, generally reduce development potential and economic welfare by widening real cross-border interest differentials. Capital controls in the form of quantitative controls, such as the Chilean unremunerated reserve requirement system, and explicit taxes on foreign investment flows impose similar welfare losses. However, quantitative controls are relatively more costly than options to tax capital flows, due to revenue effects.

Reassessing the Costs and Benefits of Imposing Capital Controls: The Case of Chile (1991–98)

ABSTRACT This paper aims to highlight some of the less-mentioned costs and benefits of imposing capital controls (in particular, on inflows) in lower income countries (LICs). The impact of controls on the effectiveness of conventional policy tools, as well as the limitations of the latter, are studied in the context of Chile's imposition of unremunerated reserve requirements (URRs) in the early 1990s. Then, using better data and a slightly different specification from earlier studies, an error-correction model for Chile's real exchange rate (RER) is set up with a view to assessing controls' impact thereon. The key finding, contrary to earlier studies, is that controls did depreciate the real exchange rate in the short-run. At the same time, an enhanced controls variable (“the effective” tax implied by the reserve requirement, a la Gallego et al., 1999) was seen to possess an inverse relationship with the equilibrium real exchange rate, suggesting the possibility of controls having facilitated an equilibrium RER appreciation in the long-run. RESUMEN. El propósito de este documento es esclarecer en cierta medida algunos de los costos beneficios mencionados con menor frecuencia, resultantes de la imposición de controles de capital (especialmente sobre los flujos de entrada de capital) en países con menor renta (LICs–lower income countries). El impacto de los controles sobre la efectividad de las herramientas inherentes a las políticas convencionales, así como la limitación de los últimos han sido estudiados en el contexto de la imposición chilena sobre las exigencias establecidas para las reservas no remuneradas (URRs) a comienzo de los años 1990s. En ese entonces, utilizando una fuente de datos más apropiada y especificaciones levemente distintas a las usadas en estudios anteriores, elaboramos un modelo de error-corrección para la tasa real cambiaria chilena (RER–real exchange rate), con el objeto de evaluar el impacto ejercido por los controles. El descubrimiento clave, contrariamente a lo encontrado en los estudios anteriores, muestra una variable de control mejorada (el impuesto “efectivo” inherente a las exigencias de la reserva, a la Gallego et al., 1999), que se observó tenía una relación con el equilibrio de la tasa cambiaria real, sugiriendo por ende que, a largo plazo, existía la posibilidad de que los controles facilitasen una apreciación RER equilibrada. RESUMO. Este estudo pretende destacar alguns dos custos e benefícios, pouco divulgados, sobre o controle da imposição de capital (particularmente, das entradas) nos países de baixa renda (LICs). O impacto do controle na eficácia dos instrumentos políticos convencionais bem como as limitações destes instrumentos são estudados no contexto da imposição do Chile dos depósitos compulsórios não remunerados (URRs), no início dos anos 90. Então, utilizando dados melhores e uma especificação um pouco diferente de estudos anteriores, um modelo de correção de erros para a taxa de câmbio real do Chile (RER) é estipulada, visando uma avaliação do impacto do controle, a partir deste momento. A descoberta principal, contrária aos primeiros estudos, é que o controle, definitivamente, deprecia a taxa de câmbio real a curto prazo. Ao mesmo tempo, uma variável de controle aumentada (um imposto “efetivo” implícito no depósito compulsório, conforme Gallego et al., 1999) parece conter uma relação contrária à taxa de câmbio real de equilíbrio, sugerindo a pos-sibilidade de que o controle tenha facilitado uma estimativa do equilíbrio da RER a longo prazo.

Unravelling Washington's Judgement Calls: The Cases of the Malaysian and Chilean Capital Controls

While the option of constraining cross‐border financial flows to emerging markets (capital controls) has taken a backseat in the official policy debates about strengthening the global financial architecture, the International Monetary Fund (IMF) has ceded that certain temporary measures to limit the inflow of hot money may be beneficial in achieving some breathing space for governments. In this sense, capital controls are only to be used as a means to reach the larger end, namely, the proper (neoliberal) management of financial liberalisation. Indeed, by sanctioning a particular type of capital control it is engaging in a political judgement call, which is based upon certain material interests, as opposed to mere economic logic. This becomes evident when we juxtapose two different types of capital controls: the Chilean unremunerated reserve requirement, which was endorsed by the Fund, and, conversely, the IMF's rejection of the Malaysian currency control. I suggest that the IMF's opposition to Malaysian controls stems from its perception that capital restraint on outflows threatens the imperative of free capital mobility, which benefits both the US and transnational financial capitals.