The effect of macroprudential policies on the green loan ratio: A case of Indonesia

• Examines the effects of a climate-linked differentiated reserve requirement on bank lending and credit risk. • Exploits Indonesia’s Green KLM policy as a quasi-natural experiment. • Reserve requirement reductions induce short-run portfolio reallocation toward green loans. • No immediate increase in credit risk is observed, while modest lagged effects may emerge. Green macroprudential policies are expanding globally as central banks incorporate climate considerations into financial stability frameworks. However, causal evidence on liquidity-based green incentives remains limited. This study examines how a climate-linked differentiated reserve requirement affects banks’ lending behavior and credit risk over a short horizon. It uses Indonesia as a case, introducing the Green Differentiated Reserve Requirement Policy, which reduces reserve requirements based on banks’ green loan ratios and generates policy-induced cross-sectional variation in funding-cost relief. Using monthly data from 20 banks during 2021–2024 and a difference-in-differences framework, we find that banks with greater exposure to the reserve requirement reduction increase their green loan ratio relative to less-exposed banks, suggesting portfolio substitution in response to marginal funding cost differentials. Dynamic panel estimates show no immediate increase in NPL ratios, while modest lagged effects from accumulated green exposures are consistent with gradual risk realization. The findings provide novel evidence that regulatory funding-cost differentials drive portfolio reallocation and risk dynamics. They also extend standard balance-sheet optimization theory to a climate-oriented macroprudential liquidity instrument within a central bank policy-mix setting.