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What determines commercial banks’ demand for reserves in the interbank market

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  • Kempa, Michal

    ()
    (University of Helsinki)

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    Abstract

    In this paper I analyse the determinants of commercial banks’ demand for reserves in the interbank market. I first document the pattern in the Eurosystem, where banks deviate from the required reserves balance at the start of the maintenance period only to meet the requirements closer to the settlement day. Using my model I show that this behaviour can be explained by certain trade-related frictions and costs. Examples include potential extra expenses tied to large transactions or the asymmetry between the cost of borrowing and profits from lending. I also find that borrowing decisions can be largely unaffected by current liquidity, which has important implications for the implementation of central bank monetary policy: in order to influence the level of interest rates, the central bank must focus on controlling market expectations.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0730netti.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 30/2007.

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    Length: 44 pages
    Date of creation: 12 Dec 2007
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2007_030

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    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Keywords: money markets; EONIA; liquidity effect;

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    1. Leonardo Bartolini & Giuseppe Bertola & Alessandro Prati, 2000. "Day-to-day monetary policy and the volatility of the federal funds interest rate," Staff Reports 110, Federal Reserve Bank of New York.
    2. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 0393, European Central Bank.
    3. Vitor Gaspar & Gabriel Pérez Quir? & Hugo Rodr?uez Mendiz?al, 2004. "Interest Rate Determination in the Interbank Market," UFAE and IAE Working Papers 603.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    4. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
    5. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2001. "Banks' reserve management, transaction costs, and the timing of Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1287-1317, July.
    6. Bartolini, Leonardo & Prati, Alessandro, 2006. "Cross-country differences in monetary policy execution and money market rates' volatility," European Economic Review, Elsevier, vol. 50(2), pages 349-376, February.
    7. Clouse, James A. & Dow, James Jr., 2002. "A computational model of banks' optimal reserve management policy," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1787-1814, September.
    8. Quiros, Gabriel Perez & Mendizabal, Hugo Rodriguez, 2006. "The Daily Market for Funds in Europe: What Has Changed with the EMU?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 91-118, February.
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