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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. Dr. Khaled Abdalla Moh'd AL-Tamimi* & Dr. Mohammad Sulieman Jaradat & Dr. Ashraf Mahammad Al-Rjoub, 2019. "The Role of Central Bank of Jordan in Economic Development," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 5(10), pages 221-226, 10-2019.
    2. Amir, Md. Khaled, 2019. "Does Excess Bank Liquidity Impact Non-Performing Loan? A Study on Bangladeshi Economy," MPRA Paper 101150, University Library of Munich, Germany, revised 10 Aug 2019.
    3. Ewerhart, Christian & Cassola, Nuno & Valla, Natacha, 2010. "Declining valuations and equilibrium bidding in central bank refinancing operations," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 30-43, January.
    4. 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.
    5. 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.
    6. M. Vari, 2014. "Implementing monetary policy in a fragmented monetary union," Working papers 529, Banque de France.
    7. Bulusu, Narayan & Guérin, Pierre, 2019. "What drives interbank loans? Evidence from Canada," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 427-444.
    8. 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.
    9. Carla Soares & Paulo M. M. Rodrigues, 2013. "Determinants of the EONIA Spread and the Financial Crisis," Manchester School, University of Manchester, vol. 81, pages 82-110, October.
    10. Fatima Sol Murta, 2007. "The Money Market Daily Session :an UHF-GARCH Model Applied to the Portuguese Case Before and After the Introduction Of the Minimum Reserve System of the Single Monetary Policy," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(3), pages 285-314.
    11. Fecht, Falko & Nyborg, Kjell G. & Rocholl, Jörg, 2008. "Liquidity management and overnight rate calendar effects: Evidence from German banks," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 7-21, March.
    12. Makarenko Mykhaylo I. & Dmytriev Evgen E., 2014. "International Approach to Structuring Liquidity of Banking Systems," Business Inform, RESEARCH CENTRE FOR INDUSTRIAL DEVELOPMENT PROBLEMS of NAS (KHARKIV, UKRAINE), Kharkiv National University of Economics, issue 3, pages 282-286.
    13. 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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