TY  - JOUR
AU  - Jallath-Coria,Eduardo
AU  - Mukhopadhyay,Tridas
AU  - Yaron,Amir
TI  - How Well Do Banks Manage Their Reserves?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9388
PY  - 2002
Y2  - December 2002
UR  - http://www.nber.org/papers/w9388
L1  - http://www.nber.org/papers/w9388.pdf
N1  - Author contact info:
Tridas Mukhopadhyay
CMU
E-Mail: tridas@cmu.edu

Amir Yaron
The Wharton School
University of Pennsylvania
2256 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6367
Tel: 215/898-1241
Fax: 215/898-6200
E-Mail: yaron@wharton.upenn.edu
AB  - 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.
ER  -