Reserve Requirements, Liquidity Risk and Credit Growth

Koray Alper, Mahir Binici, Selva Demiralp, Hakan Kara and Pınar Özbay Özlü

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic 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.

Keywords: Monetary Transmission Mechanism; Liquidity Risk; Bank Lending Channel; Turkey (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ara, nep-cba, nep-cwa, nep-mac and nep-mon
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Reserve Requirements, Liquidity Risk, and Credit Growth (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1424

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