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We study the Ricardian Equivalence Theorem in the presence of a reserve requirement. Banks pay depositors the deposit rate and receive the borrowing rate on loans. Equivalence fails because the reserve requirement drives a wedge between the deposit and borrowing rates implying that government faces a different intertemporal tradeoff than savers. A tax cut financed by an increase in government debt causes an increase in savings but only increases the supply of loanable funds by a fraction because of the reserve requirement. This causes interest rates to rise and consumption to fall. We also show that if the central bank pays interest on reserves at the borrowing rate, the various rates are equal, however, equivalence still fails. The reason is that future taxes to pay down the debt must be higher for the central bank to pay interest and consumption will fall in response. [ABSTRACT FROM AUTHOR]

The aim of the article is to study the features of the impact of monetary policy on the domestic labor market during the wartime. The main trends in the labor market of Ukraine both before the full-scale invasion of the russian federation and under martial law are determined. The indicators of official statistics on the number of unemployed are studied, assumptions about the real level of this indicator are made, and short-term trends in the revival of registration of persons in the employment center as unemployed or job seekers are predicted. The impact of the bank rate policy pursued by the central bank on employment of the population has been proved. It is determined that the overall impact of changes in the bank rate in the country depends on the ratio between small and large enterprises, as well as on the share of employees with high and low levels of education. Reserve requirements for banking institutions are mentioned as a monetary instrument for influencing the labor market. It is emphasized that one of the main obstacles to doing business in wartime is the lack of working capital. It is calculated that in the structure of loans granted by the banks of Ukraine, the dominant value (more than 70%) belongs to economic entities. Considerable attention is paid to business lending (including within the framework of the state program «Affordable Loans at 5-7-9%») as a prerequisite for the creation of new jobs. The problems of growth in the volume of non-performing loans during the wartime are considered. The catastrophic position of Ukraine in the ranking of countries by the level of NPLs in the total volume of loans issued, compiled according to the World Bank data, is underlined. The trends in the level of NPLs in Ukraine before the full-scale invasion and the reasons for the growth in the volume of non-performing loans in 2022–2023 are analyzed. It is proved that the high cost of credit resources limits the availability of working capital in business and forces it to optimize wage costs, which leads to a decrease in the level of remuneration and reduction of jobs. It is substantiated that the monetary aspects of the influence on the preservation of the labor potential of the nation acquire special importance during the war.

The aim of the article is to study the features of the impact of monetary policy on the domestic labor market during the wartime. The main trends in the labor market of Ukraine both before the full-scale invasion of the russian federation and under martial law are determined. The indicators of official statistics on the number of unemployed are studied, assumptions about the real level of this indicator are made, and short-term trends in the revival of registration of persons in the employment center as unemployed or job seekers are predicted. The impact of the bank rate policy pursued by the central bank on employment of the population has been proved. It is determined that the overall impact of changes in the bank rate in the country depends on the ratio between small and large enterprises, as well as on the share of employees with high and low levels of education. Reserve requirements for banking institutions are mentioned as a monetary instrument for influencing the labor market. It is emphasized that one of the main obstacles to doing business in wartime is the lack of working capital. It is calculated that in the structure of loans granted by the banks of Ukraine, the dominant value (more than 70%) belongs to economic entities. Considerable attention is paid to business lending (including within the framework of the state program «Affordable Loans at 5-7-9%») as a prerequisite for the creation of new jobs. The problems of growth in the volume of non-performing loans during the wartime are considered. The catastrophic position of Ukraine in the ranking of countries by the level of NPLs in the total volume of loans issued, compiled according to the World Bank data, is underlined. The trends in the level of NPLs in Ukraine before the full-scale invasion and the reasons for the growth in the volume of non-performing loans in 2022–2023 are analyzed. It is proved that the high cost of credit resources limits the availability of working capital in business and forces it to optimize wage costs, which leads to a decrease in the level of remuneration and reduction of jobs. It is substantiated that the monetary aspects of the influence on the preservation of the labor potential of the nation acquire special importance during the war. [ABSTRACT FROM AUTHOR]

As a response to the COVID-19 shock, the Uruguayan government expanded an existing public credit guarantee and introduced deductions in local currency reserve requirements. Policies of the same nature were also implemented by several governments throughout the world. This paper contributes to the financial additionality literature and the literature on the bank lending view of the monetary policy by analyzing the impact of this type of policies on loans' interest rate spread over the interbank rate. Using a very detailed database on loan contracts, we estimate a dynamic panel model to analyze the effects of policy responses to the COVID-19 shock over loan interest rates. We find that the PCG policy had a relatively higher effect on loans' interest rates in comparison to the reserve requirements policy. [ABSTRACT FROM AUTHOR]

History suggests a conflict between current Basel III liquidity ratios and monetary policy, which we call the liquidity regulation dilemma. Although forgotten, liquidity ratios, named "securities‐reserve requirements," were widely used historically, but for monetary policy (not regulatory) reasons, as central bankers recognized the contractionary effects of these ratios. We build a model rationalizing historical policies: a tighter ratio reduces the quantity of assets that banks can pledge as collateral, thus increasing interest rates. Tighter liquidity regulation paradoxically increases the need for central bank's interventions. Liquidity ratios were also used to keep yields on government bonds low when monetary policy tightened. [ABSTRACT FROM AUTHOR]

Maintaining sufficient liquidity in the financial system is vital for its stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent. [ABSTRACT FROM AUTHOR]

Unlike past literature adopting the loanable funds view, we follow the financing model of bank intermediation in order to analyse the monetary mechanisms relating to reserve requirements and compute banks' margins on their lending and deposit activities. We show that, when remunerated at a rate below the money market interest rate, reserve requirements increase the spread between bank loans and deposits interest rates, without any impact on the level of interest rates. We review and analyse the uses of reserve requirements as a prudential tool and as a monetary policy instrument. We also analyse their use for capital flows management and for de‐dollarization in emerging economies. We argue that reserve requirements are a sub‐optimal and outdated policy tool, and we suggest imposing direct taxes on banks' deposits and loans interest payments, as a more efficient alternative to reserve requirements. [ABSTRACT FROM AUTHOR]

The growing penetration of wind generation comes with implicit challenges for power system operators, one of which is the effect that additional shares have on the sufficient magnitude of reserve capacity needed. The determination of adequate reserves would enhance the efficiency and flexibility of the power system. The probabilistic methodology suggested in this paper estimates the reserve requirements as a function of historical data and estimates the incremental increase in reserve requirements as the penetration level increases. Also, the paper estimates the optimal mix of spinning reserve and standing reserve to decrease the number of part-loaded power plants and accommodate more wind power, where a synchronized plant operates less efficiently when partially loaded to provide a reserve. The adopted methodology is applied to real data collected from aggregated wind farms in the period from 2015 to 2020.

We propose a chance-constrained formulation for the problem of dimensioning frequency restoration reserves on a power transmission network. We cast our problem as a two-stage stochastic mixed integer linear program, and propose a heuristic algorithm for solving the problem. Our model accounts for the simultaneous sizing of both upward and downward reserves, and uncertainty driven by imbalances, contingencies and available transmission capacity. Our core methodology is further adapted in order to minimize inter-zonal flows and in order to split reserve requirements between automatic and manual frequency restoration reserves. We apply our methodology to the problem of sizing reserves in the four load frequency control areas of the Swedish power system. We demonstrate the benefits of our method in terms of decreasing reserve requirements in the absence of reserve sharing, we analyze the spatial allocation of reserves, and we perform various sensitivity analyses. [ABSTRACT FROM AUTHOR]

This study provides an empirical analysis of the two macroprudential instruments, namely the reserve option mechanism and the interest rate corridor, employed by the Central Bank of the Republic of Turkey in the aftermath of the global financial crisis. A nine-variable structural vector autoregressive model for Turkey is estimated with Bayesian techniques utilising data from October 2010 to May 2018. A set of timing, zero and sign restrictions are imposed to identify the reserve requirement and the interest rate shocks through the bank lending channel. The results reveal that the new policy frame is efficient in curbing the volatility in the exchange rates and in improving the current account balance. While the reserve requirements seem to be more effective on the current account and partly on the exchange rate, the interest rate fares better in controlling the price level. [ABSTRACT FROM AUTHOR]

As renewable energy penetration increases and system inertia levels drop, primary frequency control is becoming a critical concern in relatively small interconnections such as the Electric Reliability Council of Texas (ERCOT). To address this problem ERCOT is implementing a number of market rule changes including the introduction of a new Fast Frequency Response (FFR) reserve type to the electricity market. This FFR reserve type aims to help the traditional Primary Frequency Response (PFR) reserve type in arresting frequency decline in the event of a large generator outage. This paper derives reserve requirements to ensure sufficient reserve to arrest frequency decline before reaching the critical frequency threshold while coupling PFR reserve, FFR reserve, and system inertia. The general reserve requirement places limits on the amount of PFR reserve that can be provided by each unit based on its ramping capabilities. Two such limits are derived from first principles and another is proposed that is capable of accommodating the equivalency ratio introduced in previous work. These PFR reserve limits also provide first principles insight into equivalency ratios, which have only been studied empirically in the past. High-level insights are provided on a large Texas test case. [ABSTRACT FROM AUTHOR]

Midcontinent Independent System Operator (MISO) plans to introduce 30-minute short-term reserve (STR) to address 30 minutes system flexibility needs. Transmission bottlenecks in the power system may inhibit the deliverability of STR. Insufficient deliverable reserve may require additional operator manual adjustments, which may be uneconomic and distort the market price signal. To improve reserve deliverability, event-based zonal STR clearing model and nodal STR clearing model are proposed to distribute reserve across the grid. This paper compares reserve deliverability and market clearing prices between the zonal STR model and the nodal STR model. A new design on penalty function is proposed in this paper to reflect the true value of security constraints for reserve deployment with the consideration of multiple events. Analysis of MISO test cases shows that the zonal approach is imprecise and may not guarantee the actual post-event flows within the physical limits. Nodal STR model can improve the reserve deliverability, market efficiency, and price signal. [ABSTRACT FROM AUTHOR]

This study provides an empirical analysis of the two macroprudential instruments, namely the reserve option mechanism and the interest rate corridor, employed by the Central Bank of the Republic of Turkey in the aftermath of the global financial crisis. A nine-variable structural vector autoregressive model for Turkey is estimated with Bayesian techniques utilising data from October 2010 to May 2018. A set of timing, zero and sign restrictions are imposed to identify the reserve requirement and the interest rate shocks through the bank lending channel. The results reveal that the new policy frame is efficient in curbing the volatility in the exchange rates and in improving the current account balance. While the reserve requirements seem to be more effective on the current account and partly on the exchange rate, the interest rate fares better in controlling the price level.

We develop a multi-period stochastic optimization framework for identifying operating reserve requirements in power systems with significant penetration of renewable energy resources. Our model captures different types of operating reserves, uncertainty in renewable energy generation and demand, and differences in generator operation time scales. Along with planning for reserve capacity, our model is designed to provide recommendations about base-load generation in a non-anticipative manner, while power network and reserve utilization decisions are made in an adaptive manner. We propose a rolling horizon framework with look-ahead approximation in which the optimization problem can be written as a two-stage stochastic linear program (2-SLP) in each time period. Our 2-SLPs are solved using a sequential sampling method, stochastic decomposition, which has been shown to be effective for power system optimization. Further, as market operations impose strict time requirements for providing dispatch decisions, we propose a warm-starting mechanism to speed up this algorithm. Our experimental results, based on IEEE test systems, establish the value of our stochastic approach when compared both to deterministic rules from the literature and to current practice. The resulting computational improvements demonstrate the applicability of our approach to real power systems. [ABSTRACT FROM AUTHOR]

For the sixth time, international academics and practitioners met for a successful credit risk conference. Keynote speeches and academic sessions highlighted current developments and necessary improvements in areas such as fintech, regulation, credit ratings and risk analysis. Digitization also leaves its mark in this area and requires, to varying degrees, a transformation of affected persons as well as applied systems or models. [ABSTRACT FROM AUTHOR]

In recent years, some central banks have been implementing reserve requirements in monetary policy management, and some of these central banks have been paying interest on required reserves. Like these central banks, The Central Bank of the Republic of Turkey (CBRT) pays a certain amount of interest to both the conventional and participation banks. Since participation banks have to comply with the principles of interest-free banking, they do not use interests in any way and cause them to suffer. The contract of qard is a type of contract which is considered to be suitable in terms of fiqh when it does not yield any return to the lender. In periods of high inflation, the lender will suffer as much as the inflation rate when the lender receives back the amount of debt he has given. For this reason, contemporary jurists find it appropriate to compensate for this loss in the repayment of the debt owed. In this article, in accordance with this eligibility, an approach is presented in which CBRT receives Turkish lira and US dolar required reserves from the participation banks in accordance with the qard contract and CBRT pays an indexed on inflation instead of interest for the price it receives. [ABSTRACT FROM AUTHOR]

This paper studies the growth and welfare effects of macroprudential regulation in an overlapping generations model of endogenous growth with banking and agency costs. Indivisible investment projects combine with informational imperfections to create a double moral hazard problem à la Holmström–Tirole and a role for bank monitoring. When the optimal monitoring intensity is endogenously determined, an increase in the required reserve ratio (motivated by systemic risk considerations) has conflicting effects on investment and growth. On one hand, requiring banks to put away a fraction of the deposits that they receive reduces the supply of loanable funds. On the other, a higher required ratio raises incentives to save and mitigates banks' incentives to monitor, thereby lowering monitoring costs and freeing up resources to increase lending. In addition, it may mitigate the systemic risk externality associated with excessive leverage. This trade-off can be internalized by choosing the required reserve ratio that maximizes growth and welfare. However, the risk of disintermediation means that in practice financial supervision may also need to be strengthened, and the perimeter of regulation broadened, if the optimal ratio is relatively high. [ABSTRACT FROM AUTHOR]

Copyright of Brazilian Journal of Applied Economics / Economía Aplicada is the property of FEA-RP, Universidade de Sao Paulo and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Bank regulatory design relies critically on bank risk modeling. Traditionally, the bank's aggregate value is assumed to obey an exogenously specified process (e.g., a lognormal diffusion). We demonstrate that this assumption is generally invalid given the truncated and correlated payoff structure of individual bank loans. Instead, the bank's aggregate terminal payoff is significantly (left) fat tailed. This skewness remains even when the bank holds an infinitely large number of loans in its portfolio unless they are uncorrelated. By ignoring skewness in bank payoffs, deposit insurance premia and capital requirements have traditionally been significantly mis-calculated. [ABSTRACT FROM AUTHOR]

This paper shows that the existence of deposit and lending facilities combined with an averaging provision for the reserve requirement are powerful tools to stabilize the overnight rate. We reach this conclusion by comparing the behavior of this rate in Germany before and after the start of the EMU. The analysis of the German experience allows us to isolate the effects on the overnight rate of these particular instruments of monetary policy. To illustrate that this outcome is a general conclusion and not a particular result of the German market, we develop a theoretical model of reserve management, which is able to reproduce our empirical findings. [ABSTRACT FROM AUTHOR]

We propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements, and study the interaction of profit-maximizing banks with a central bank targeting interest rates at high frequency. The model yields predictions on biweekly patterns of the federal funds rate's volatility and on its response to changes in target rates and in intervention procedures, such as those implemented by the Fed in 1994. Theoretical results are consistent with empirical patterns of interest rate volatility in the U.S. market for federal funds. [ABSTRACT FROM AUTHOR]

The 1996 Amendment to the Basle capital accord to incorporate market risks constitutes a breakthrough in the determination of capital requirements. Rather than dictating these requirements through a uniform supervisory approach, banks are allowed to use their own, internal models for computing the capital required. In order to mitigate moral hazard problems and stimulate banks to use adequate internal models, the models must be subjected to a back-testing procedure. If a model produces too many incorrect predictions, increased capital requirements result. This paper provides an evaluation of the current internal models approach in conjunction with the proposed back-testing procedure. In particular, using a stylized representation of the present supervisory framework, we investigate whether banks are provided with the right incentives to come up with the correct internal model. We find that, under the current regulatory framework, banks are prone to underreporting their true market risk. A much stricter penalty scheme is required in order to align banks' incentives with those of the supervisor. We check the sensitivity of our results to changes in the length of the planning horizon, portfolio risk, time preferences, risk attitudes, and the distribution of financial returns. [ABSTRACT FROM AUTHOR]

Economists have long believed that, absent any public withdrawals of high-powered money, an unregulated, closed banking system can expand its assets and liabilities without encountering any shortage of reserves so long as its members act in concert. Notwithstanding its popularity, this "in-concert overexpansion" doctrine is inconsistent with standard theories of the precautionary demand for bank reserves. Unless these theories are themselves incorrect, concerns that complete removal of legal restrictions on the competitive supply of bank money must result in an unstable or indeterminate bank-money multiplier are misplaced. [ABSTRACT FROM AUTHOR]

Banks can create liquidity precisely because deposits are fragile and prone to runs. Increased uncertainty makes deposits excessively fragile, creating a role for outside bank capital. Greater bank capital reduces the probability of financial distress but also reduces liquidity creation. The quantity of capital influences the amount that banks can induce borrowers to pay. Optimal bank capital structure trades off effects on liquidity creation, costs of bank distress, and the ability to force borrower repayment. The model explains the decline in bank capital over the last two centuries. It identifies overlooked consequences of having regulatory capital requirements and deposit insurance. [ABSTRACT FROM AUTHOR]

Unless priced and administered appropriately, a governmental safety net enhances risk-shifting opportunities for banks. This paper quantifies regulatory efforts to use capital requirements to control risk-shifting by U.S. banks during 1985 to 1994 and investigates how much risk-based capital requirements and other deposit-insurance reforms improved this control. We find that capital discipline did not prevent large banks from shifting risk onto the safety net. Banks with low capital and debt-to-deposits ratios overcame outside discipline better than other banks. Mandates introduced by 1991 legislation have improved but did not establish full regulatory control over bank risk-shifting incentives. [ABSTRACT FROM AUTHOR]

Repo auctions are multiunit auctions regularly used by central banks to inject liquidity into the banking sector. Banks have a fundamental need to participate because they have to satisfy reserve requirements. Superficially, repo auctions resemble treasury auctions; the format and rules are similar and there is an active secondary market for the underlying asset. However, using a bidder level dataset of the European Central Bank’s main repo auctions, we find evidence that the economic issues in repo auctions may be very different. Unlike what has been documented in the treasury auctions literature, we find no evidence that private information and the winner’s curse are important issues. Instead our findings suggest that bidders are more concerned with the loser’s nightmare, collateral, and future interest rate reductions by the ECB. Small and large bidders use different strategies, with large bidders performing better.

We review the economics of bank regulation as developed in the contemporary literature. We begin with an examination of the central aspects of modem banking theories in explaining the asset transformation function of intermediaries, optimal bank liability contracts, coordination problems leading to bank failures and their empirical significance. and the regulatory interventions suggested by these considerations. in particular, we locus on regulations aimed primarily at ameliorating deposit-insurance-related moral hazards, such as cash-asset reserve requirements, risk-sensitive capital requirements and deposit insurance premia, and bank closure policy. Moreover, we examine the impact of the competitive environment (bank charter value) and industry structure (scope of banks) on these moral hazards. We also examine the implications of banking theory for alternatives to deposit insurance. [ABSTRACT FROM AUTHOR]

Although solar photovoltaic (PV) systems are environmentally friendly, policy makers and power system operators have concerns regarding the high penetration of these systems due to potential impacts of solar power intermittency on power systems. Understanding the nature of this intermittency is important to make informed decisions regarding solar power plants, size and location, transmission and distribution systems planning, as well as thermal generation units and electricity markets operations. This article presents a review of solar PV power characteristics and its impacts on power system operation. [ABSTRACT FROM AUTHOR]

Copyright of Journal of Economics Business & Finance Research / Ekonomi İşletme ve Maliye Araştırmaları Dergisi is the property of Irfan Ersin and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

This paper deals with the problem of clearing sequential electricity markets under uncertainty. We consider the European approach, where reserves are traded separately from energy to meet exogenous reserve requirements. Recently, proposed stochastic dispatch models that co-optimize these services provide the most efficient solution in terms of expected operating costs by computing reserve needs endogenously. However, these models are incompatible with existing market designs. This paper proposes a new method to compute reserve requirements that bring the outcome of sequential markets closer to the stochastic energy and reserves co-optimization in terms of cost efficiency. Our method is based on a stochastic bilevel program that implicitly improves the inter-temporal coordination of energy and reserve markets, but remains compatible with the European market design. We use two standard IEEE reliability test cases to illustrate the benefit of intelligently setting operating reserves in single and multiple reserve control zones. [ABSTRACT FROM AUTHOR]

Accurate wind power forecasting is crucial for setting reserve dimensions of a power system. From the perspective of power grid dispatcher, one of the most critical issues of dealing with the uncertainty brought by wind power forecast error (WPFE) is to analyse its extreme value to decide the new reserve requirements induced by variable wind power. This study targets at predicting the daily maximum of day‐ahead WPFE via extreme value analysis approach considering its application of operating reserve planning. Non‐stationary block maxima method (NS‐BMM) is applied to model the probabilistic characteristic of daily maxima WPFE via fitting the non‐linear relationship between distribution parameters and the covariates. To better shape the non‐stationarity, a conditional NS‐BMM (CNS‐BMM) via partition according to wind conditions is proposed. Moreover, indicators to evaluate the quality of applying NS‐BMMs in the day‐ahead reserve plan are also discussed. Finally, a case study based on the operational data from a typical wind farm in northern China is carried out. Results show that CNS‐BMM offers a better model of daily maximum WPFE compared to not only traditional quantile regression but also non‐CNS‐BMM, and applying the estimate of daily maximum WPFE on reserve plan demonstrates an advantage over conventional three‐sigma method. [ABSTRACT FROM AUTHOR]

The article reports on financial intermediation and monetary policy through a general equilibrium banking model. The effect of monetary policy on the level of financial intermediation is examined with particular focus on when an expansionary monetary policy results in an increase in lending or inflation. The financial intermediaries discussed are traditional banks which are subject to reserve requirements. The monetary policies are linked because of the budget constraint of the government and are instituted through open market operations and nominal reserve changes.

The article presents an analysis of the multiple reserve requirement scheme of central banking and national fiscal and monetary policy. The traditional monetary concerns of small open economies are described, focusing on managing inflation while still financing the public deficit, usually through required bank reserve levels. The alternative method of multiple reserve requirements for differing currencies, cash and government securities, is formally outlined. Impacts of this scheme on inflation, seigniorage, and welfare are explored.