How Abundant Are Reserves? Evidence From the Wholesale Payment System

Categories : Regulation and Payment System Governance, Regulation of Digital Financial Services


Author: Bank of International Settlements

As central banks start to shrink their balance sheets while tightening policy in response to inflation, the deposit balances of commercial banks (“reserve holdings”) are set to shrink as a consequence. Adequate reserve holdings underpin smoothly functioning short-term funding markets, and central banks will need to determine the scope for a smooth reduction in reserves. This BIS paper approaches the issue of adequacy of reserve holdings by gauging how much outgoing payments depend on incoming payments. As reserve balances are deposits held by commercial banks at the central bank, outgoing payments reduce the reserve balance of the bank making the payment. Delaying payments until incoming payments replenish reserves would conserve reserves. The sensitivity of outgoing payments to incoming payments can therefore serve as a gauge of the value placed by commercial banks on their reserves.