Dividend Policy Decisions

Liquidity Injection and its impact. Based on our study we found out that: 1. Liquidity Injection Does Not Automatically Boost Lending The government’s placement of IDR 200 trillion in state-owned banks may prevent idle funds at Bank Indonesia and improve banks’ balance sheets, but it does not guarantee stronger credit growth or economic recovery. Indonesia’s credit transmission mechanism remains weak due to risk aversion, limited credit demand, and structural rigidities in the economy. 2. Weak Link Between Lending Rates and Credit Growth Empirical analysis (including a VAR model) shows that lending rate movements have minimal impact on credit volumes, particularly for MSMEs. High lending rates are not mainly due to liquidity shortages but reflect risk premiums, regulatory constraints, and banks’ cautious behavior. Firms are often hindered by complex procedures and high collateral requirements rather than by interest rates themselves. 3. Banks Prefer Safe Assets Over Productive Lending Even with additional liquidity, banks tend to channel surplus funds into government securities rather than loans to the real sector, reflecting a “substitution effect.” The IFG regression analysis confirms that liquidity injections are more likely to increase banks’ holdings of safe assets than their lending portfolios, undermining the policy’s stimulative goals. 4. Lessons from the KUR Program: Targeting Matters The Kredit Usaha Rakyat (KUR) program offers lessons on the limits of liquidity-based interventions. Despite massive disbursements, its macroeconomic impact remains modest—a 1% increase in KUR loans raises MSME GDP contribution by only 0.2%. Success rates are higher among middle-aged, educated borrowers, suggesting the need for targeted allocation toward groups with higher probability of success. Without targeting, liquidity support risks becoming fiscally costly but economically shallow. 5. Weak Credit Demand and Household Sentiment Credit growth has slowed sharply, from 9.55% (YoY) in late 2024 to 7.03% in mid-2025, mainly due to declining working capital loans, which are vital for productive activity. Weak consumer confidence (CCI) and previously contracting PMI indicate soft demand, especially among households, even as business sentiment begins to show early signs of recovery. The report is brought to you by Indonesia Financial Group (IFG) Progress, written by Mohammad Alvin Prabowosunu and Erin Glory. Link to the report: https://lnkd.in/eQe2aAkT

Late August 2025, the Monetary Authority of Singapore (#MAS) published a consultation paper addressing Guidelines on Liquidity Risk Management (Banks). The guidelines are based on the Principles for Sound Liquidity Risk Management and Supervision issued by the Basel Committee on Banking Supervision (#BCBS) issued in 2008 and 𝗶𝗻𝗰𝗼𝗿𝗽𝗼𝗿𝗮𝘁𝗲 𝗶𝗻𝘀𝗶𝗴𝗵𝘁𝘀 𝗴𝗮𝗶𝗻𝗲𝗱 𝗳𝗿𝗼𝗺 𝘁𝗵𝗲 𝗯𝗮𝗻𝗸𝗶𝗻𝗴 𝗲𝘃𝗲𝗻𝘁𝘀 𝗶𝗻 𝗠𝗮𝗿𝗰𝗵 𝟮𝟬𝟮𝟯, the period which witnessed deposit runs at multiple banks, where 𝗼𝘂𝘁𝗳𝗹𝗼𝘄 𝗿𝗮𝘁𝗲𝘀 𝘄𝗲𝗿𝗲 𝗺𝗼𝗿𝗲 𝘀𝗲𝘃𝗲𝗿𝗲 𝘁𝗵𝗮𝗻 𝗽𝗮𝘀𝘁 𝘀𝘁𝗿𝗲𝘀𝘀𝗳𝘂𝗹 𝗲𝘃𝗲𝗻𝘁𝘀 leading to failure of several long established banking institutions. As per MAS, mismanagement of liquidity risk can have 𝙨𝙚𝙫𝙚𝙧𝙚 𝙧𝙚𝙥𝙚𝙧𝙘𝙪𝙨𝙨𝙞𝙤𝙣𝙨, potentially leading to a 𝘽𝙖𝙣𝙠'𝙨 𝙛𝙖𝙞𝙡𝙪𝙧𝙚 𝙩𝙤 𝙢𝙚𝙚𝙩 𝙛𝙞𝙣𝙖𝙣𝙘𝙞𝙖𝙡 𝙤𝙗𝙡𝙞𝙜𝙖𝙩𝙞𝙤𝙣𝙨, thereby undermining public and market confidence in a Bank. On the other hand, a crisis of confidence, arising from poor management of business activities or other forms of risks, can trigger liquidity stress events. By implementing robust liquidity risk management practices, a Bank can reduce the likelihood of experiencing liquidity shortages while establishing critical buffers, allowing valuable time to address underlying issues. Therefore, it is 𝗰𝗿𝘂𝗰𝗶𝗮𝗹 for a Bank to implement 𝗲𝗳𝗳𝗲𝗰𝘁𝗶𝘃𝗲 𝗹𝗶𝗾𝘂𝗶𝗱𝗶𝘁𝘆 𝗿𝗶𝘀𝗸 𝗺𝗮𝗻𝗮𝗴𝗲𝗺𝗲𝗻𝘁 𝗽𝗼𝗹𝗶𝗰𝗶𝗲𝘀 and practices. This includes establishing well-defined risk management frameworks and processes to maintain a sound funding profile, ensure sufficient liquidity to meet obligations, and 𝗯𝘂𝗶𝗹𝗱 𝗿𝗲𝘀𝗶𝗹𝗶𝗲𝗻𝗰𝗲 𝗮𝗴𝗮𝗶𝗻𝘀𝘁 𝘃𝗮𝗿𝗶𝗼𝘂𝘀 𝘀𝘁𝗿𝗲𝘀𝘀 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀, 𝗶𝗻𝗰𝗹𝘂𝗱𝗶𝗻𝗴 𝘀𝗲𝘃𝗲𝗿𝗲 𝗼𝗻𝗲𝘀. #riskmanagement #liquidityrisk #LCR #NSFR #liquiditycoveragratio #fundingrisk #stablefunding #bankfailure #stresstesting #intradayliquidity #riskmeasurement #riskassessment #boardofdirectors #management #CRO #riskappetite #riskmetrics #SVB #ALCO #liquiditygovernance #resources #supervisoryguidelines #liquidityshortage #knowledge #information #depositoutflow #cashflow

Bangladesh’s decision to let exporters access offshore dollar loans at around 8% is a major change in trade financing policy. Domestic working capital loans cost 14 to 16%, so this move greatly lowers financing costs. It helps ease the pressure on exporters' cash flow and cuts overall production expenses. This is crucial in a competitive global environment where countries like India, Vietnam, and China offer cheaper credit to their export sectors. The facility boosts liquidity by injecting foreign currency directly into businesses while tying repayment to export earnings. This approach reduces the risks of currency mismatch. It also offsets the downsizing of the Export Development Fund, creating more options for trade finance. If managed well, this policy can improve cost efficiency, support export growth, and help Bangladesh move toward a more market-driven external financing framework.

"Repo Markets and the Liquidity Risk Premium: An ALM Lens" (by Alessio Gioia) A recent paper from the Federal Reserve Bank of New York by Adam Copeland and Owen Engbretson provides a very insightful perspective on a key, yet often underappreciated, component of balance sheet management: 👉 the liquidity risk premium embedded in repo markets The paper shows that the cost of holding liquidity buffers — reflected in repo pricing — is directly influenced by monetary policy, and importantly: * The relationship is nonlinear * It depends on both policy rates and aggregate reserves * Even small changes in policy variables can materially affect repo spreads For example: ➡️ a 100 bps increase in the interest on reserves translates into a measurable increase in the liquidity premium embedded in repo transactions. From an Asset & Liability Management perspective, this is highly relevant and goes well beyond securities dealing. 1. Liquidity premium as a structural component of FTP The empirical link between rates and repo spreads provides a strong foundation to: * better quantify liquidity premiums * incorporate them more consistently into Funds Transfer Pricing (FTP) frameworks ➡️ Liquidity is not just a buffer — it has a dynamic and policy-sensitive cost 2. Liquidity buffers are not neutral Holding high-quality liquid assets (HQLA): * mitigates funding risk * but generates an opportunity cost linked to monetary policy This implies that: * ALM decisions on buffer size must balance resilience vs profitability * the optimal liquidity level is state-dependent, not static 3. Repo as a transmission channel of monetary policy Repo markets are not just a short-term funding tool. They act as a real-time indicator of liquidity conditions and: * transmit changes in central bank policy * reflect shifts in market liquidity demand and supply * embed the true marginal cost of secured funding ➡️ Monitoring repo pricing becomes essential for forward-looking ALM management 4. Implications for capital and balance sheet structure For institutions active in securities intermediation: * maintaining liquidity buffers requires balance sheet capacity and capital allocation * changes in liquidity premiums can influence: * asset allocation * funding mix * leverage decisions This creates a strong link between: 👉 liquidity management, capital efficiency, and profitability This paper reinforces a key concept: 👉 Liquidity is not free, and its cost is deeply intertwined with monetary policy. #ALM #AssetLiabilityManagement #LiquidityRisk #RepoMarkets #FundingStrategy #FTP #BalanceSheetManagement #BankTreasury #MonetaryPolicy #FinancialMarkets #RiskManagement #ALCO

The Federal Reserve just reinforced what many of us managing corporate balance sheets have suspected: more rate cuts may not be coming particularly soon. At its March meeting, the FOMC held rates steady at 4.25%-4.5%, but the bigger message was in what they didn’t say. They removed language suggesting balanced risks to inflation and employment and introduced a key phrase—“uncertainty around the economic outlook has increased.” In other words, don’t expect a clear policy direction soon. Some key takeaways… • Rate cuts are not a given. While the median projection still calls for two cuts in 2025, more FOMC participants now expect just one—or none at all. • Inflation concerns remain. Powell explicitly linked higher inflation forecasts to tariffs, underscoring how external factors are complicating the Fed’s decision-making. • Balance sheet runoff is slowing. The Fed is reducing its quantitative tightening (QT) pace to prevent liquidity stress in the Treasury market, though mortgage-backed securities will continue rolling off. What This Means for CFOs and Treasurers… For companies with floating-rate debt, this is a reminder to plan for an extended period of borrowing costs at this level. The market may still be pricing in rate cuts, but the Fed is clearly in “wait-and-see” mode. • Liquidity management remains critical. The Fed’s QT slowdown is aimed at avoiding a funding squeeze, but liquidity conditions could still tighten. • Watch trade policy closely. Tariffs are emerging as a wildcard for inflation—and, by extension, monetary policy. Powell said it best: “We are in no hurry.” Neither should we be when it comes to assuming lower rates. The best approach? Stay agile and scenario-plan rigorously. #finance #economy #policy #inflation #federalreserve #business #tariffs