Short-run Behavior of Defensive Assets in the Ethiopian Commercial Banking Sector

Abstract

The paper aims to identify and measure the impact of factors responsible in shaping the behavior of defensive assets in the Ethiopian banking sector. The focus of the analysis is on the Ethiopian banking sector rather than an individual bank. An attempt is made to capture how the Ethiopian banking sector adjusts its defensive asset position to changes in money supply, relative yields on asset holdings, discount rate, the demand for different bank assets, availability of funds, and legal reserve requirements. Except for required reserves, discount rate and relative yields on asset holdings, the rest of the explanatory variables are statistically significant in explaining the short-run behavior of defensive assets. The paper concludes initial stock of excess reserves, treasury bills, loans and their lag, narrow money supply, saving deposit of the public held with different financial institutions, and bank capital are what explain short-run behavior of defensive assets in the Ethiopian banking sector. Finally, the difference in the behavior of excess & free reserves found to be negligible which is a signal of insignificant use of short-term borrowings in the Ethiopian commercial banking system.