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Reserve Requirements, Liquidity Risk, and Bank Lending Behavior

Listed author(s):
  • Koray Alper

    (Central Bank of the Republic of Turkey)

  • Mahir Binici

    (Central Bank of the Republic of Turkey)

  • Selva Demiralp

    ()

    (Koc University)

  • Hakan Kara

    (Central Bank of the Republic of Turkey)

  • Pınar Ozlu

    (Central Bank of the Republic of Turkey)

Although reserve requirements have been used in emerging markets to smooth credit cycles, the exact transmission mechanism remains to be explored. Using bank level data, this study looks inside the black-box to unveil the interaction of reserve requirement policy with bank lending. We identify a new channel that works through a decline in bank liquidity and loan supply due to an increase in reserve requirements. We show that “quantitative tightening” through reserve requirements affect the funding needs and the liquidity position of the banking system. The consequent changes in bank liquidity have a significant impact on the bank lending behavior.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1612.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 1612.

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Length: 20 pages
Date of creation: Nov 2016
Handle: RePEc:koc:wpaper:1612
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  1. Carrera, Cesar & Vega, Hugo, 2012. "Interbank Market and Macroprudential Tools in a DSGE Model," Working Papers 2012-014, Banco Central de Reserva del Perú.
  2. Koray Alper & Mahir Binici & Selva Demiralp & Hakan Kara & Pinar Ozlu, 2014. "Reserve Requirements, Liquidity Risk and Credit Growth," Working Papers 1424, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  3. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
  4. Simon T Gray, 2011. "Central Bank Balances and Reserve Requirements," IMF Working Papers 11/36, International Monetary Fund.
  5. Pablo Federico & Carlos A. Vegh & Guillermo Vuletin, 2014. "Reserve Requirement Policy over the Business Cycle," IMES Discussion Paper Series 14-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
  6. Mahir Binici & Hasan Erol & A. Hakan Kara & Pinar Ozlu & Deren Unalmis, 2013. "Interest Rate Corridor : A New Macroprudential Tool?," CBT Research Notes in Economics 1320, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  7. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
  8. Friedman, Benjamin M. & Kuttner, Kenneth N., 2010. "Implementation of Monetary Policy: How Do Central Banks Set Interest Rates?," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 24, pages 1345-1438 Elsevier.
  9. International Monetary Fund, 2012. "Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America," IMF Working Papers 12/142, International Monetary Fund.
  10. Hernando Vargas Herrera & Yanneth R Betancourt & Carlos Varela & Norberto Rodriguez, 2011. "Effects of reserve requirements in an inflation targeting regime: the case of Colombia," BIS Papers chapters,in: Bank for International Settlements (ed.), The global crisis and financial intermediation in emerging market economies, volume 54, pages 133-169 Bank for International Settlements.
  11. Yanneth Rocío Betancourt & Hernando Vargas, 2008. "Encajes bancarios y la estrategia de inflación objetivo," Borradores de Economia 533, Banco de la Republica de Colombia.
  12. Reinhart, Carmen M & Reinhart, Vincent R, 1999. "On the Use of Reserve Requirements in Dealing with Capital Flow Problems," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 27-54, January.
  13. Christian Glocker & Pascal Towbin, 2012. "The Macroeconomic Effects Of Reserve Requirements," EcoMod2012 3850, EcoMod.
  14. Koray Alper & Defne Mutluer Kurul & Ramazan Karasahin, 2011. "Arzin Merkezine Seyahat : Bankacilarla Yapilan Gorusmelerden Elde Edilen Bilgilerle Turk Bankacilik Sektorunun Davranisi," Working Papers 1124, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  15. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 121-141, February.
  16. Christian Glocker & Pascal Towbin, 2012. "The Macroeconomic Effects of Reserve Requirements," WIFO Working Papers 420, WIFO.
  17. Cornett, Marcia Millon & McNutt, Jamie John & Strahan, Philip E. & Tehranian, Hassan, 2011. "Liquidity risk management and credit supply in the financial crisis," Journal of Financial Economics, Elsevier, vol. 101(2), pages 297-312, August.
  18. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  19. Di Giorgio, Giorgio, 1999. "Financial development and reserve requirements," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1031-1041, July.
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