The Survey of Effectiveness of Statutory Reserve Ratio as an Instrument of Monetary Policy and Evaluation of Its Balance Sheet Effects on Banking System of the Country

In the filed of monetary policy, the statutory reserve ratio is considered as an indirect monetary instrument which could be declared and notified by the monetary authorities to the banking system and usually, with the aim of short term monetary management, it affects the behavior of banks and other regulated financial institutions.In this paper, an attempt is made to investigate the performance of statutory reserve ratio as an instrument of monetary policy and its balance sheet effects based on the existing data derived from the financial statement of total banking system, and to evaluate them in a Structured Systemic Model. To trace the balance sheet effects of this instrument of monetary policy, we have observed that the three percentage point increase in statutory reserve ratio, through extension of credit channel, to different scenarios, may reduce the major items of assets and liabilities of banking balance sheet, while the balance of profit/loss may reduce.In fact, it is observed that under the current state of banking system in Iran, the higher non-performing loans, the increasing cost of financial liabilities, the high cost of provisioning for non-performing loans and the high opportunity cost of holding the statutory reserves with the Central Bank, VIZ – a - VIZ the implementing of monetary policy, may lead to reduction of operational and non operational costs more than the operational and non-operational revenues. Where, subsequently, the balance of gross profit will increase in toto. Thus, under the current structure, the execution of contractory monetary policy and the complementary impact of money multiplier, despite the reduction of sources and uses, will improve the financial soundness indicator of banking system. In general, evaluation of monetary policy in our study indicates that the likelihood of turning point of profit/loss will occur in non performing loan ratio of below the 7%.