Research Discussion Papers, Bank of Finland
What determines commercial banks’ demand for reserves in the interbank market
Abstract: In this paper I analyse the determinants of commercial
banks’ demand for reserves in the interbank market. I first document the
pattern in the Eurosystem, where banks deviate from the required reserves
balance at the start of the maintenance period only to meet the
requirements closer to the settlement day. Using my model I show that this
behaviour can be explained by certain trade-related frictions and costs.
Examples include potential extra expenses tied to large transactions or the
asymmetry between the cost of borrowing and profits from lending. I also
find that borrowing decisions can be largely unaffected by current
liquidity, which has important implications for the implementation of
central bank monetary policy: in order to influence the level of interest
rates, the central bank must focus on controlling market expectations.
Keywords: money markets; EONIA; liquidity effect; (follow links to similar papers)
JEL-Codes: E43; E52; E58; (follow links to similar papers)
44 pages, December 12, 2007
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