How Well Do Banks Manage Their Reserves?

31 Pages Posted: 14 Dec 2002 Last revised: 28 Aug 2021

See all articles by Eduardo Jallath-Coria

Eduardo Jallath-Coria

Banco de Mexico

Tridas Mukhopadhyay

Carnegie Mellon University - David A. Tepper School of Business

Amir Yaron

Bank of Israel; University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Date Written: December 2002

Abstract

In this paper we investigate how well banks manage their reserves. The optimal policy takes into account expected foregone interest on excess reserves and penalty costs for going below required reserves. Using a unique panel data-set on daily clearing house settlements of a cross-section of Mexican banks we estimate the deposit uncertainty banks face, and in turn their optimal reserve behavior. The most important variables for forecasting the deposit uncertainty are the interbank fund-transfers of the day, certain calendar dates, and the interest differential between the money market rate and the discount rate - a measure reflecting the bank's opportunity cost of money holdings. For most banks the model's prediction accord relatively well with the observed reserve behavior of banks. The model produces reserves costs that are significantly smaller relative to the case when reserves are set via simple rule of thumb. Furthermore, alternative motives for holding reserves (such as liquidity and reputation effects) do not seem to be the explanation for why certain banks hold relatively large reserves.

Suggested Citation

Jallath-Coria, Eduardo and Mukhopadhyay, Tridas and Yaron, Amir and Yaron, Amir, How Well Do Banks Manage Their Reserves? (December 2002). Available at SSRN: https://ssrn.com/abstract=362070

Eduardo Jallath-Coria

Banco de Mexico ( email )

Av. 5 de Mayo 18
Piso 4
Col. Centro 06059, 06059
Mexico

Tridas Mukhopadhyay

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2307 (Phone)

HOME PAGE: http://web.gsia.cmu.edu/display_faculty.aspx?id=102

Amir Yaron (Contact Author)

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1241 (Phone)
215-898-6200 (Fax)

Bank of Israel

P.O. Box 780
Jerusalem, 91907
Israel

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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