The impact of the excess reserves of the banking sector on interest rates and money supply in Poland

In this monograph we aim to analyse the effects of leaving excess reserves in the banking sector by the central bank on the level and the variability of interest rates, as well as on money supply. To this end, we use mainly data for Poland, but in some cases, for robustness, also for a panel of Poland, the euro area, the Czech Republic and Hungary, as there had only been a limited variability in some policy variables in our sample for Poland. We estimate the parameters of GARCH, (P)VAR (vector autoregressive or panel vector autoregressive) and (panel) linear regression models. We find that excess reserves affect the level and the variability of an overnight money market interest rate. However, the variability of the overnight money market interest rate, shaped to a large extent by excess reserves, does not affect the level of longer-term interest rates, and we find little evidence of its impact on their variability. Neither do excess reserves translate into higher money supply. Our results imply that the current monetary policy operational framework in Poland is adequate to ensure the transmission of the central bank policy rate to money market interest rates. Furthermore, it appears unlikely that raising the amount of excess reserves left, as proposed by some policymakers, would affect money supply. Instead, it would lower the money multiplier and the overnight money market interest rate, as well as increase its volatility.

Arbitrage Capital of Global Banks

We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions—in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage. In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, we find that the primary response of global banks to the reform was a cutback in arbitrage positions that relied on unsecured funding, rather than a reduction in loan provision.

Off the Rails: The Real Effects of Railroad Bond Defaults following the Panic of 1873

Although corporate default crises are often quite severe, previous work has found little impact on real macroeconomic variables. This article investigates the relationship between railroad defaults and the balance sheets of local banks following the Panic of 1873. Receivers appointed to run railroads in default lacked the legal tools necessary to fully maintain railroad operations. The results indicate that railroad bond defaults negatively impacted the lending activity of local banks. Affected banks experienced declines in loans and deposits along with increases in excess reserves. These findings point to a disruption of the transportation network attributable to the railroad bond default crisis.

Application of fiber-optic measuring technology and phase-chronometric method for control and monitoring of technical condition of aircraft structures

Problems of ensuring the safe operation of an aircraft from the point of view of the fatigue life of its structure are considered. The relevance of the creation and implementation of diagnostic systems for monitoring the technical condition of structures of complex technical objects is shown on the example of a helicopter. An original approach to the creation and implementation of complex systems for diagnostics and monitoring of the technical condition of complex technical objects is presented, combining fiber-optic measuring technology and phase-chronometric method. It is shown that the use of monitoring and diagnostic systems ensures the transition to operation based on the actual technical condition. The proposed approach makes it possible to increase the time between overhaul intervals and reduce excess reserves in terms of the reliability factors of structures, which increases the flight performance of aircraft.

Ways to regulate bank liquidity by managing assets and liabilities

Insufficient level of liquid funds in banking activity is the main reason for its financial difficulties and, accordingly, the appearance of a shortage of payment funds. The article describes various methods of liquidity management. One of them is the optimal placement of your own and equivalent funds. The method requires maintaining a certain level of highly liquid assets. This method is used by banks in an undeveloped financial market. The second method of managing liquidity is to regulate the volume and structure of liabilities, which are secured by attracting external loans. This method is used by large banks. The article notes that each of these methods has liquidity management tools. In foreign countries, assets are classified into primary and secondary reserves. Secondary reserves are a complement to primary. The article shows that a large amount of money on deposit accounts of commercial banks can lead to rampant inflation. To regulate the money supply, the Central Bank conducts a policy of credit expansion or credit restriction. The authors note, a more effective tool is an increase or decrease in the base rate (discount), the use of which reduces or increases the excess reserves of banks and their ability to create new money. The participation of the Central Bank in the open market for the purchase and sale of securities, the establishment of minimum reserve requirements for commercial banks also allows you to reduce or increase the creation of new deposits. The authors show that the regulation of commercial banks' liquidity management methods maximizes revenue and minimizes banking services.

Prices may rise if lending picks up in major economies

Significance Similar fears accompanied the 2008-09 anti-crisis response, but did not come true. The main reason is that, while quantitative easing and other measures boost the monetary base (M0), inflation is more likely to be fired by strong growth in the broadest monetary aggregate (M3); so far, there has been limited pass-through from M0 to M3. Impacts Central bank money supply is underwriting stock market gains, an intended monetary policy outcome; but stock market volatility is rising. If higher inflation does occur, central banks have the tools to control it; indeed, rising prices has been a central monetary policy goal. If inflationary pressures do appear, reducing the large volumes of banks’ excess reserves will require adroit management.

Monetary Base Controllability after an Exit from Quantitative Easing

This study examines the problem that a central bank may face after exiting a monetary quantitative easing policy. It develops a simple dynamic optimization model of a central bank, which finds that if the bank needs to absorb a substantial amount of excess reserves when exiting, the monetary base may become uncontrollable. In this case, the bank has no option but to increase the monetary base by more than the target amount, which leads to an undesirable money supply expansion and, ultimately, to inflation pressures. The model shows the condition when a central bank faces such a challenging situation.