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Reserve Requirements, Liquidity Risk, and Bank Lending Behavior
Author(s) -
ALPER KORAY,
BINICI MAHIR,
DEMIRALP SELVA,
KARA HAKAN,
ÖZLÜ PINAR
Publication year - 2018
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12475
Subject(s) - market liquidity , collateralized debt obligation , business , financial system , reserve requirement , loan , credit risk , monetary economics , central bank , finance , economics , monetary policy , collateral
Abstract Although reserve requirements (RR) have been used in emerging markets to smooth credit cycles, the transmission mechanism remains blurry. Using bank‐level data, we unveil the interaction of RR with bank lending. We identify a new channel that works through a decline in banks’ liquid assets and loan supply due to an increase in RR. “Quantitative tightening” through RR raises the short‐term funding needs of the banking system, which is met by collateralized central bank lending, thus depleting banks’ unencumbered liquid assets. Our results suggest that such a shift in bank liquidity is associated with a significant change in lending.