Remuneration of Required Reserves at the Current Repo Rate

Abstract

In this chapter, we expand the base model by assuming that there are two time periods which cover a reserve maintenance period. For fulfilling their reserve requirements banks can make use of averaging provisions. An important feature of our model is that reserves are remunerated at the end of each period at the current repo rate. As in the base model, the banks can cover their liquidity needs either by borrowing from the central bank or in the interbank market where they can also place liquidity. A further crucial feature of our model is that the banks can borrow in each period from the central bank as well as in the interbank market, and that the maturities of all loans is one period, i.e. the maturities of the central bank credits do not overlap. Within this framework, the banks have to decide on their optimal borrowing from the central bank, their optimal transactions in the interbank market, and on the optimal intertemporal allocation of their required reserve holdings. A main result is that within this model framework, the banks’ liquidity management is not influenced by a change in the repo rate within the reserve maintenance period. Independently of a change in the repo rate, reserves are provided smoothly over the maintenance period and borrowing from the central bank corresponds to the central bank’s benchmark. Moreover, we show that banks are not affected differently by a monetary impulse in the form of a change in the repo rate.