Central bank reserves and bank lending spreads

Lucas Fuhrer, Thomas Nitschka and Dan Wunderli

Applied Economics Letters, 2021, vol. 28, issue 15, 1301-1305

Abstract: Since the financial crisis, central bank reserves in the financial system have increased considerably and nowadays represent a significant part of banks’ total assets. We provide empirical evidence that an increase in reserves lowers banks’ lending spreads, i.e. interest rates relative to maturity-matched risk-free rates. Consequently, our analysis shows that central banks can affect bank lending conditions not only by changing the policy rate but also via the quantity of reserves.

Date: 2021
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DOI: 10.1080/13504851.2020.1809627

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