👇Just published in collaboration with #Eurosystem colleagues: our @ecb Occasional paper on the link between demand for central bank reserves and monetary policy implementation frameworks 🤓💫 #bdfeco Thread 1/7 ecb.europa.eu/pub/pdf/scpops…

9:09 PM · Sep 22, 2021

3
25
8
88
While not covering everything (esp. on the regulatory stuff), we look at how the demand for reserves differs depending on the type of MP frameworks, ie corridor or floor system and how the demand for reserves may have increased endogenously in an ample liquidity environment 2/7
1
0
0
3
Indeed, a floor system eliminates the opportunity costs for holding reserves (no positive spread between money market rates ant the DFR). There are no incentives for interbank money market activity. Not a judgement on the system, just an observation. 3/7
1
0
0
8
In the current situation of a floor system and ample liquidity, there is some evidence that banks now consider their projected payment needs to estimate their preferred level of excess liquidity holdings, given the (relatively) attractive yield of reserves. 4/7
1
0
0
1
While reserves and other HQLA assets are facially equivalent in terms of LCR, the latter may still affect the demand for reserves as banks may prefer to hold excess liquidity as insurance against liquidity outflows, including for valuation (level and variation) reasons. 5/7
1
0
0
2
The distribution of excess liquidity may be asymmetric or concentrated, as illustrated by the current environment, with potential implications for aggregate demand for reserves. 6/7
1
0
1
3
Our updated estimation using Veyrune et al. methodology confirms high uncertainty regarding the level of "FREL" (floor required excess reserves) in the euro area but a figure moving towards around 1 tr€ in recent period 7/7
1
0
0
1