Central Bank Reserves Research Articles

Central bank reserves during the Bretton Woods period: new data from France, the UK and Switzerland

This paper presents new daily data on central bank reserves during the Bretton Woods period. It is the first paper to provide daily data for the Bank of France, Bank of England and Swiss National Bank directly from these central bank’s archives. I discuss some of the issue with these data and make them available to other researchers for further analysis.

The role and significance of planning in the determination of house prices in Australia: Recent policy debates

On the world stage, Australian cities have been punching above their weight in global indexes of housing prices, sparking heated debates about the causes of and remedies for, sustained house price inflation. This paper examines the evidence base underpinning such debates, and the policy claims made by key commentators and stakeholders. With reference to the wider context of Australia’s housing market over a 20 year period, as well as an in depth analysis of a research paper by Australia’s central Reserve Bank, we show how economic theories commonly position land use planning as a primary driver of new supply constraints but overlook other explanations for housing market behavior. In doing so, we offer an alternative understanding of urban housing markets and land use planning interventions as a basis for more effective policy intervention in Australian and other world cities.

Liquidity, Liquidity Everywhere, Not a Drop to Use - Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity

Liquidity, Liquidity Everywhere, Not a Drop to Use - Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity

Leverage Constraints and Bank Monitoring: Bank Regulation versus Monetary Policy

Bank leverage constraints can emerge from regulatory capital requirements as well as from central bank collateral requirements in reserve lending facilities. While these two channels are usually examined separately, we are able to compare them with the help of a bank money creation model in which central bank reserves have to be acquired to settle interbank liabilities. In particular, we show that with regard to bank monitoring, monetary policy via collateral requirements leads to a unique collateral leverage channel, which cannot be replicated by standard capital requirements. Through this channel, banks can expand loan supply and deposit issuance when they face liquidity constraints, by raising the collateral value of their loans with tighter monitoring of firms. The collateral leverage channel can improve welfare beyond standard bank capital regulation. Our results may inform current policy debates, such as the design of central bank collateral frameworks or the question whether monetary policy remains effective in times with large central bank reserves.

Central bank gold reserves and sovereign credit risk

Gold holdings with central banks are often considered to play a stabilizing role in times of crisis. This study performs a cross-country panel data analysis of developed and developing countries to determine whether gold holdings of central banks contribute to sovereign creditworthiness. Our analysis confirms that an increase in central bank gold reserves reduces the credit default swap (CDS) spreads of a country. We also observe that during global crisis and country-specific crisis episodes, the role of central bank gold becomes even more important. In robustness tests, we account for potential endogeneity of central bank gold reserves using a Generalized Method of Moments (GMM) approach. The findings highlight the importance of gold in central bank reserves and indicate a positive role of gold in mitigating a nation's external vulnerabilities in an uncertain global economic environment.

The Implications of Liquidity Regulation for Monetary Policy Implementation and the Central Bank Balance Sheet Size: An Empirical Analysis of the Euro Area

We analyse the impact of the Liquidity Coverage Ratio (LCR) on the demand for central bank reserves in the euro area with difference-in-differences estimation techniques. Using a novel dataset and an identification strategy that exploits the cross-country heterogeneity in the regulatory treatment of reserves for LCR purposes prior to the announcement of a harmonised euro area standard as a quasi-natural experiment, we find evidence that points to LCR-induced demand for reserves. Specifically, our results suggest that banks with low LCRs relative to peers increased their central bank reserve holdings as a result of the LCR regulation. Our findings have economically meaningful implications for the operational framework of monetary policy and imply that the Eurosystem’s balance sheet may need to remain larger than it was prior to the financial crisis and the associated introduction of new liquidity regulation.

Demand for Central Bank Reserves and Monetary Policy Implementation Frameworks: The Case of the Eurosystem

Demand for Central Bank Reserves and Monetary Policy Implementation Frameworks: The Case of the Eurosystem

Bitcoin: A New Digital Gold Standard in the 21st Century?

Since a mysterious creator under the alias Satoshi Nakamoto (a pseudonym) launched first successful cryptocurrency in January 2009, he (or could be she) also opened the door for never-ending criticism, claims, arguments, plethora of articles, and media frenzy all contemplating what Bitcoin is. This paper concludes that Bitcoin is not a currency to be used for every-day transactions like all fiat currencies. Furthermore, Bitcoin is not a stable cryptocurrency and it is useless (and impractical) of arguing how Bitcoin meets or fails basic functions of money; to make it clear, Bitcoin satisfies all three functions of money (not to the extent of fiat currencies, nonetheless it does); store of value, unit of account, and medium of exchange. As discussed in this article, our proposal of Bitcoin as a supranational central bank reserve currency not only will put an end to debates and the frequently asked old question of “what is Bitcoin?”, it will also make Bitcoin’s design flaws disappear instantly. Under the new Bitcoin standard (Gold 2.0), inefficiencies become trivial because Bitcoin is capable of easily handling the volume of operations among central banks. Bitcoin’s extensively discussed weaknesses become no issue; high latency (a block of transactions is validated every 10 minutes), low processing speed (3-7 transactions per second), huge power cost (mining of 1 bitcoin requires 1,825 kWh of electricity, equivalent to 63 days of power usage by a U.S. household), and low scalability (the maximum number of bitcoins is fixed at 21 million). Key elements of the proposed new Bitcoin Standard include: Bitcoin will be a supranational reserve currency used by central banks only; ownership, trade, and other uses of bitcoins by citizens and various entities will be prohibited; the fixed supply of bitcoins (21 million) will remain unchanged; every country’s financial authority will switch to central bank digital coins (CBDC); CBDCs will be defined in bitcoin by a corresponding exchange rate for each country; 100% of CBDCs will be 100% backed by bitcoins; any increase in the digital money supply by a central bank will require additional bitcoins; and the value of each bitcoin will be raised to a price level to cover 100% of the total money in circulation (approximately $75 trillion).

A Joint Foreign Currency Risk Management Approach for Sovereign Assets and Liabilities

A sovereign asset and liability management framework for managing foreign currency risk requires a joint analysis of (i) the external financial liabilities resulting from a country’s sovereign debt and (ii) the foreign exchange assets of its central bank. The study recommends a practical approach that includes analysis of the foreign exchange positions of central bank reserves and central government debt portfolios and optimization of the net position. A quantitative method is employed for efficient management of foreign exchange risk. The model is tested for seven countries (Albania, Ghana, North Macedonia, South Africa, the Republic of Korea, Tunisia, and Uruguay).

The 100% Reserve Reform: Calamity or Opportunity?

This paper considers the various 100% Reserve plans that have appeared since the interwar period and have since then been adapted. In all formulations of those schemes, Government liabilities (cash, central bank reserves and short-term Treasuries) back banks’ sight deposits. This organization contrasts with current so-called “fractional reserve banking”, in which, as a result of reserve requirements imposed by the central bank (Drumetz et al., 2015), reserves back only a small fraction of sight deposits. The paper briefly presents the six categories of plans. It then highlights their common features as well as their differences, showing that the differences are more numerous than the common features. The criticisms voiced against the different formulations of 100% Reserves are exposed, adding those of the author and distinguishing between the doubts expressed on the validity of the analysis on one hand, and some undesirable consequences of the reform on the other. In spite of these criticisms, it then shown that the 100% Reserve reform is becoming topical, with recent private sector, central banks and political initiatives that relate to it. Overall, the 100% Reserve reform does not appear as a meaningful opportunity to improve the functioning of banking systems. Furthermore, at least one of its variants could easily turn into a calamity. Fortunately, it is not that variant that is getting more topical.

Central bank reserves and bank lending spreads

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.

Bilateral cross-border banking and macroeconomic determinants

This paper studies the bilateral determinants of the international asset positions of banks, and subsequent bilateral adjustment during the global financial crisis and ensuing recovery phase. We find empirical support for traditional gravity-type variables. Exploiting a comprehensive dataset of bilateral bank assets, combined with a cross-country database on capital controls and macroeconomic policies, empirical evidence is provided for the effects of macroeconomic tools on the portfolio reallocation of internationally active banks. Specifically, higher current account balances in recipient countries are associated with higher inflows in debt assets, while restrictions on asset inflows and higher central bank reserves are related to lower cross-border flows of bank investment during the crisis and post-crisis periods, with heterogeneous effects across asset type. Finally, stronger institutions in recipient countries are positively associated with the international investment of banks, with inflows to debt assets being the most sensitive asset category across the financial cycle.

El Salvador

A technical Assistance (TA) Mission was conducted by CAPTAC-DR1 from May 14 to 18, 2018 with the objective of supporting the Central Reserve Bank of El Salvador (CBR) in its efforts to strengthen its national accounts statistics for decision making. The TA mission covered the following topics: compilation of an Input-Output Table (IOT) for 2014; as well as to follow up on the recommendations made in previous TA missions to disseminate Supply and Use Tables (SUT) for 2015 and thereafter, as part of the national accounts’ series with base year 2005. In addition, the mission provided training to the Department of National Accounts (DNA) team of the CBR in the methodological and conceptual aspects necessary for the analysis and application of the IOT as a statistical and analytical tool.

Investors with the Golden-i: Preference in Gold-i Investment

Gold price has risen recently after the United States implemented a drastic monetary action by reducing interest rate to almost zero to cushion the effect of Covid-19 pandemic on the economy. However, what has actually triggered the gold price could be beyond Covid-19. Therefore, this study examines the factors influencing customers’ preference in gold investment (Gold-i). Two variables; inflation and income growth are significant while interest rate is not significant in relation to Gold-i preference. Since interest rate relates to the strength of US Dollar, central bank reserves and investment demand, it could be postulated that during the study in 2019, interest rate and gold price had risen in tandem. This research further enriches knowledge and contributes to advancement of research in gold investment, hence enabling researchers, bankers, investors, trade policy makers to further understand the investment in gold-i during economic crises, in particular the current recession triggered by the Covid-19 pandemic.

El Salvador

A Technical Assistance (TA) mission was conducted by the Regional Technical Assistance Center for Central America, Panama, and the Dominican Republic (CAPTAC-DR) from February 26–March 2, 2018, to assist the Central Reserve Bank of El Salvador (BCRES) with concluding the compilation of the Monthly Volume Indicator of Economic Activity (Índice Mensual de Volumen de la Actividad Económica – IMVAE)1 for dissemination and the development of annual institutional sector accounts (AISAs). The purpose of this mission was to follow up on the recommendations made by a previous mission that took place in September 2017: to compile the IMVAE with base year 2005, and to assess the data sources available for AISA compilation, using the data previously compiled for 2005 as background. The mission considered the BCRES decision to start regular compilation as of 2014.

The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations

We estimate the effects of the liquidity coverage ratio (LCR), a liquidity requirement for banks, on the tenders that banks submit in Term Deposit Facility operations, a Federal Reserve tool created to manage the quantity of central bank reserves. We identify these effects using variation in LCR requirements across banks and a change over time that allowed term deposits to count toward the LCR. Banks subject to the LCR submit tenders more often and submit larger tenders than exempt banks when term deposits qualify for the LCR. These results suggest that liquidity regulation affects bank demand in monetary policy operations.

El Salvador

A Technical Assistance (TA) Mission from the Regional Technical Assistance Center for Central America, Panama, and the Dominican Republic, visited the city of San Salvador, El Salvador, on August 13–24, 2018, to provide TA to the Central Reserve Bank of El Salvador (BCRES) on compiling annual accounts by institutional sectors (AAIS) from 2014 onwards, as part of the data series from the base year of 2005. In March 2018, the BCRES published a dataset of quarterly and annual national accounts series by economic activity; a monthly volume indicator; backcasted series from 1990–2014; and Supply and Use Tables (SUT) from 2005 and 2014, with a base year of 2005. As part of the dataset to be prepared and disseminated in the new 2005 base year, the authorities requested TA to compile annual accounts focusing on institutional sectors starting in 2014.

Equity market reaction to regulatory reforms: a case study of Indian banks

PurposeNon-performing assets (NPAs) have been a cause of concern for the banking sector across the world and have invited a lot research interest, especially for emerging economies. In India, the NPAs grew many folds and reached alarming levels in 2013. The available mechanisms, such as Corporate Debt Restructuring Scheme, were not adequate to address this issue. The Central Reserve Bank of India with the Government of India introduced various guidelines, schemes and regulations like framework for revitalizing distressed assets to tackle NPAs during the period 2013-2017. Taking the case of India, the purpose of this paper is to examine policy initiatives and analyse the impact of regulatory shocks on the equity market returns and the systematic risk of individual banking stocks using an extended version of the market model.Design/methodology/approachIn this study, the authors design the experiment to explore the reaction of banking stocks to the various regulatory measures and also measure the change in systematic risk for these stocks as a result of the regulatory changes. Following the approach suggested by Soraokina and Thornton (2015), the authors use the extended market model to test the reaction of banking company stocks to the regulatory measures.FindingsThe study finds that banking stocks did not earn significant abnormal returns on the announcement of these measures. However, the systematic risk of the banking index reduced significantly on the introduction of regulatory measures, and this risk reduction has been primarily in the stocks of private sector banks.Research limitations/implicationsThis paper provides insights on the equity market's short-term reaction to the reform initiatives introduced by the government. The scope of the paper is with respect to one emerging economy, India, which underwent a series of regulatory reforms to tackle the banking NPA problem.Originality/valueThe paper fills an important research gap where the impact of schemes and regulations is captured for an emerging economy like India. It tries to bring forth the importance of these reforms and how an investor perceives the same. This paper tests for changes in systematic risk as measured by market beta as well as measures cumulative abnormal returns associated with important events in the process of regulatory reforms happening in India from 2013 to 2017.

Interest Rate Pass-Through and Bank Risk-Taking under Negative-Rate Policies with Tiered Remuneration of Central Bank Reserves

We identify the effects of negative interest rate policies on bank behavior using difference-in differences identification and data on all Swiss banks. First, we find that going negative can interrupt not only the pass-through from policy to deposit rates, but also that to mortgage rates. Second, banks’ ability to offset negative deposit margins with increased mortgage margins is shown to depend on market power. Third, imposing negative rates on all central bank reserves causes banks to replace one sixth with riskier assets, and cut another sixth without replacement, shortening their balance sheets. Together with increased mortgage margins and fee income, the asset replacement preserves profits, but increases financial stability risks. Fourth, mortgage margin increases, balance sheet contractions and risk increases differ from positive rate policy. Fifth, the interruption in pass-through and the risks to financial stability can be reduced by up to 90% through tiered remuneration, charging marginal reserves only.

Empirical and Normative Economics: A Game Theoretic Approach

An important problem in public finance is the interaction of public finance with private finance—particularly when private financial markets crash, then bank runs occur, and a central bank needs to bail out the banks to prevent an economic depression. Historically, private financial markets have periodically crashed (financial bubbles); and then public finance (central bank reserves) have sometimes bailed out banks, to prevent a depression. The reason this pattern (of a lack of regulation to prevent financial bubbles, but then bailing out banks) has historically recurred has been the use of an idealized economic theory of “perfect market”—used in economic policy to avoid appropriate regulation of a financial market. In this research, we formulate a “game-theoretic approach” to include financial regulation as an explicit part of the model of a financial market. Future research direction from this game approach can extend the traditional “endogenous economic theory of markets” into an empirical modeling technique—which can ground economic theory in the real history of market instabilities.