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Reserve Requirements, Liquidity Risk, and Credit Growth

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Koray Alper & Mahir Binici & Selva Demiralp & Hakan Kara & Pinar Ozlu, 2014. "Reserve Requirements, Liquidity Risk, and Credit Growth," Koç University-TUSIAD Economic Research Forum Working Papers 1416, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1416
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Pierre-Richard Agénor & K. Alper & L. Pereira da Silva, 2015. "External Shocks, Financial Volatility and Reserve Requirements in an Open Economy," Working Papers Series 396, Central Bank of Brazil, Research Department.
    2. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz A., 2014. "Sudden floods, macroprudential regulation and stability in an open economy," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 68-100.
    3. repec:wly:jmoncb:v:50:y:2018:i:4:p:817-827 is not listed on IDEAS
    4. Hakan Kara, 2016. "Turkey's experience with macroprudential policy," BIS Papers chapters,in: Bank for International Settlements (ed.), Macroprudential policy, volume 86, pages 123-139 Bank for International Settlements.
    5. Koray Alper & Mahir Binici & Selva Demiralp & Hakan Kara & Pınar Ozlu, 2016. "Reserve Requirements, Liquidity Risk, and Bank Lending Behavior," Koç University-TUSIAD Economic Research Forum Working Papers 1612, Koc University-TUSIAD Economic Research Forum.
    6. Pérez-Forero, Fernando & Vega, Marco, 2014. "The Dynamic Effects of Interest Rates and Reserve Requirements," Working Papers 2014-018, Banco Central de Reserva del Perú.
    7. Akturk, Halit & Gocen, Hasan & Duran, Suleyman, 2015. "Money Multiplier under Reserve Option Mechanism," MPRA Paper 64803, University Library of Munich, Germany.

    More about this item

    Keywords

    Monetary transmission mechanism; liquidity risk; bank lending channel; Turkey.;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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