According to Article of 11.1 of the Law on the Central bank /Bank of Mongolia/ the reserve requirement (RR) is one of the tools used by the Bank of Mongolia to implement monetary policy instruments. The reserve requirement requires banks to deposit a certain percentage of its funds collected from others in their current account at the Central bank, and this tool is used to i) maintain the bank’s ability to quickly execute payments, ii) to manage the money supply in the economy iii) and is used within the context of macroprudential policies.
The act of determining and monitoring the reserve ratio is regulated by Article 12 of the Law on the Central Bank /Bank of Mongolia/ and “The regulation for setting, calculating and monitoring reserves of banks” approved by the Decree No. A-295 of the Governor of the Bank of Mongolia.
The Bank of Mongolia sets the RR amount of all commercial banks every 14 days and monitors their balances and maintenance. The maintenance of MNT and foreign currency RR is calculated as an average, which allows banks to meet their reserves at the beginning or end of the maintenance period without fluctuating short-term interest rates when the banking system as a whole has surplus or deficit reserves. In addition, the Bank of Mongolia may set different interest rates for MNT and foreign currency RR as part of the macro-prudential policy.
Article 12 of the Law on the Central Bank /Bank of Mongolia/ states that:
- The Bank of Mongolia shall require banks to maintain certain amount of reserves that must be held by a commercial bank as a percentage of the balance of deposits and current accounts of individuals and legal entities and other liabilities of the bank to be determined by the Bank of Mongolia.
- The Bank of Mongolia shall set bank reserve requirements up to 30 percent and it may set different reserve requirements depending on the type and duration of public deposits mobilized.
- Bank reserves may be held in the form of cash holdings or in the form of current accounts balances with the Bank of Mongolia.
- Bank of Mongolia may pay interest on part of reserves above the minimum requirements.
- The Bank of Mongolia shall impose penalty on banks failing to maintain reserve requirements. The maximum penalty rate shall not exceed the highest interest charged by the Bank of Mongolia to the banks plus 5 percentage points.
- The Bank of Mongolia shall issue Regulation on determining, calculation and supervision over the reserve requirements.
RR requirement maintenance
Banks are required to meet their RR requirements set by the Bank of Mongolia daily and on the 14-day average. The Bank of Mongolia can pay an interest to banks that have met their reserve requirements in accordance with Article 12.4 of the Law on the Central Bank of Mongolia, and the bonus rate is approved by the decree of the Governor of the Bank of Mongolia.
On the other hand, a bank who failed to meet the RR requirements daily, on an average of 14 days or failed to meet both at the same time will be penalized in accordance with Article 12.5 of the law on the Central Bank /Bank of Mongolia/. The penalized bank will not be granted an interest during the period of maintenance. The upper limit of the penalty is to be no more than 5.0 percentage points added to the highest interest rate offered by the Bank of Mongolia.
RR interest rate
The Monetary Policy Committee of the Bank of Mongolia discusses and decides the RR interest rate, and according to Article 12 of the Law on the Central bank /Bank of Mongolia/, the interest rate should not exceed 30 percent. In the past, the amount of foreign currency and MNT interest rates were set at the same percentage, but as part of the macro-prudential policy, it has been set differently since 2018.
Table 1: Interest rate change of RR
|№||Effective date||RR interest rate (MNT, FC)|
|5||5/9/2018||10.5% (MNT), 12% (FC)|
|6||1/1/2020||10.5% (MNT), 15% (FC)|
|7||3/25/2020||8.5% (MNT), 15% (FC)|
|8||12/2/2020||6% (MNT), 15% (FC)|
|9||12/29/2021||6% (MNT), 18% (FC)|
|10||2/9/2022||8% (MNT), 18% (FC)|