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Reserve Requirements, Liquidity Risk, and Credit Growth

Listed author(s):
  • Koray Alper

    (Central Bank of Turkey)

  • Mahir Binici

    (Central Bank of Turkey)

  • Selva Demiralp

    ()

    (Department of Economics, Koc University)

  • Hakan Kara

    (Central Bank of Turkey)

  • Pinar Ozlu

    (Central Bank of Turkey)

Many central banks in emerging economies have used reserve requirements (RR) to alleviate the trade-off between financial stability and price stability in recent years. Notwithstanding their widespread use, transmission channels of RR have remained largely as a black-box. In this paper, we use bank-level data to explore the interaction between RR and bank lending behavior. Our empirical findings suggest that short-term borrowing from the central bank is not a close substitute for deposits for banks. Bank lending behavior responds significantly to reserve requirements and liquidity positions. Our analysis allows us to identify a new channel that we name as the “liquidity channel”. The channel works through a decline in bank liquidity and loan supply due to an increase in reserve requirements.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1416.pdf
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Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1416.

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Length: 54 pages
Date of creation: Jul 2014
Handle: RePEc:koc:wpaper:1416
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