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Central Bank and Commercial Banks' Liquidity Management - What is the Relationship?

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  • Ulrich Bindseil
  • Benedict Weller
  • Flemming Wuertz

Abstract

The paper explores the relation between individual banks' liquidity management in the euro area and the ECB's management of the aggregate current accounts held by banks with the Eurosystem. It is argued that, in the case of the euro area with its large, remunerated reserve requirements that have to be fulfilled only on average over a one-month period, the banks' demand for working balances to serve as a buffer against market imperfections is always below reserve requirements. It is therefore normally sufficient for the ECB when steering short-term interest rates to control aggregate liquidity in a way that the aggregate banking system is in a position to fulfil adequately its reserve requirements. In particular, the ECB normally does not need to take care of any factors that affect temporarily the demand for working balances, such as the level and uncertainties of interbank payment flows. However, two exceptions are noteworthy and are discussed in the paper: the banks' balance sheet management activities implying a regular end of month peak of the EONIA rate; and the liquidity situation in the case of substantive market tensions as in the days following the terrorist attacks of 11 September 2001. The need of the ECB's liquidity management to address the associated deviations from a model of perfect markets is discussed. Copyright Banca Monte dei Paschi di Siena SpA, 2003

Suggested Citation

  • Ulrich Bindseil & Benedict Weller & Flemming Wuertz, 2003. "Central Bank and Commercial Banks' Liquidity Management - What is the Relationship?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 32(1), pages 37-66, February.
  • Handle: RePEc:bla:ecnote:v:32:y:2003:i:1:p:37-66
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    Cited by:

    1. Bindseil, Ulrich & Nyborg, Kjell G., 2007. "Monetary policy implementation: A European Perspective," Discussion Papers 2007/10, Norwegian School of Economics, Department of Business and Management Science.
    2. Craig, Ben & Fecht, Falko, 2007. "The eurosystem money market auctions: A banking perspective," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2925-2944, September.
    3. M. Vari, 2014. "Implementing monetary policy in a fragmented monetary union," Working papers 529, Banque de France.
    4. Abbassi, Puriya & Nautz, Dieter, 2012. "Monetary transmission right from the start: On the information content of the Eurosystem's main refinancing operations," The North American Journal of Economics and Finance, Elsevier, vol. 23(1), pages 54-69.
    5. Narayan Bulusu & Pierre Guérin, 2018. "What Drives Interbank Loans? Evidence from Canada," Staff Working Papers 18-5, Bank of Canada.
    6. Osborne, Matthew, 2016. "Monetary policy and volatility in the sterling money market," Bank of England working papers 588, Bank of England.

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