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.

KEYWORDS:

• Central bank reserves
• bank lending spreads

JEL CLASSIFICATION:

• E40
• E50
• G21

Acknowledgments

We would like to thank Robert Bichsel, Petra Gerlach, Matthias Jüttner and Carlos Lenz for their helpful comments and suggestions. We also thank the anonymous referee for valuable comments and suggestions. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Swiss National Bank (SNB) or the Swiss Financial Market Supervisory Authority (FINMA).

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ Note that even when deposits are remunerated at 0% they are costly from an operational or regulatory perspective.

² Another approach would be to reduce deposits, which we do not further discuss in this analysis.

³ Excess reserves are defined as reserves which exceed the minimum reserve requirement set by the central bank.

⁴ For more details, see Lambertini et al. (2019) and Auer and Ongena (2019).

⁵ For additional descriptive statistics, please see Lambertini et al. (2019).

⁶ Note that the SNB’s policy tools since the financial crisis consist of currency intervention and low interest rates. No lending programmes, which could be particularly attractive for some banks have been established.

⁷ The analysis is based on Lambertini et al. (2019).

⁸ For the sake of brevity, these coefficients are not reported in the regression analysis.

⁹ Note that we additionally conducted the regression specification for the sample period i) prior to the minimum exchange rate as well as ii) during and thereafter. The coefficient of interest is negative and statistically significant for both periods.