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The reserve fulfilment path of euro area commercial banks: empirical testing using panel data

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  • Cassola, Nuno
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    Abstract

    The theory of liquidity management under uncertainty predicts that, under certain conditions, commercial banks will accumulate minimum reserve requirements linearly over the reserve maintenance period. This prediction is empirically tested using daily data (from March 2004 until February 2007) on the current accounts and minimum reserve requirements of a panel of 79 commercial banks from the euro area. The linear accumulation hypothesis is not rejected by the data with the exception of small banks which build-up excess reserves. The empirical analysis suggest that idiosyncratic liquidity uncertainty is much higher than aggregate liquidity uncertainty. Nevertheless, on the penultimate day in the reserve maintenance period, the inverse demand schedule of the representative bank is relatively flat around the middle of the interest rate corridor set by the standing facilities. This suggests that liquidity e¤ects on the overnight inter-bank rate should be very muted on this day. Our calibration exercise suggests that the probability of an individual bank's daily overdraft in the euro area is very low (less than 1:0%). This is conrmed by the analysis of the daily recourses to the marginal lending facility by the panel banks. JEL Classification: C23, E4, E5, G2

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 0869.

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    Date of creation: Feb 2008
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    Handle: RePEc:ecb:ecbwps:20080869

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    Keywords: liquidity management; monetary policy implementation; Panel data; Rate corridor; reserve requirements;

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