Interest Rate Corridor, Liquidity Management, and the Overnight Spread

Küçük, Hande; Özlü, Pınar Özbay; Talasli, Ismail; Ünalmış, Deren; Yuksel, Canan

doi:10.1111/coep.12165

Cited by 19 publications

(12 citation statements)

References 18 publications

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“…They indicated that through the use of the asymmetric corridor policy and liquidity management strategy together, monetary policy is able to affect credit and deposit rates. Küçük et al (2014) concentrated on the wide interest rate corridor policy tool developed by the CBT in the second half of 2010 when there was excessive volatility resulting from short-term capital inflows.…”

Section: Literature On Monetary Policy Of the Central Bank Of Turkeymentioning

confidence: 99%

Perspectives on Monetary Policy and Cost of Capital: Evidence from Turkey

Turguttopbaş

2017

Journal of Central Banking Theory and Practice

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Abstract:The target of monetary policy is generally set as to create an environment of manageable employment and affordable long-term interest rates. However, priorities of central banks may differ depending on economic and financial circumstances of individual countries. Modern approaches to monetary policy transmission can be grouped under two headings, Money View and Credit View. The money view concentrates on interest rates to explain the effects of monetary policy on aggregate spending by creating an interest rate channel. The credit channel transmission approach focuses on the supply of credits by banks following a monetary policy shift in interest rates. In 2010, the Central Bank of Turkey (CBT) developed an interest rate corridor shaped by one-week and overnight repo lending to the financial banks to absorb excessive volatility caused by short-term capital inflows. Under this framework, the CBT implements its monetary policy in two ways; firstly it can alter the interest rates of weekly repo as well as O/N lending rate. Secondly, it can configure the funding structure it provides to the financial intermediaries. In such a framework, the interest rate transmission mechanism has been operated by two benchmark interest rates, one of which is the weighted average of the cost of funds provided by the CBT and the other is the interest rate in Borsa Istanbul (BIST) money market transactions at an overnight maturity. There is a strong co-movement between the interest rates and they are affected by the movements in the CBT lending rate in both directions. Interest rates applied to deposits and loans by banks are affected by the policy rate (CBT Average Funding Rate) and the market rate (BIST O/N Repo Rate).

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Section: Literature On Monetary Policy Of the Central Bank Of Turkeymentioning

confidence: 99%

Perspectives on Monetary Policy and Cost of Capital: Evidence from Turkey

Turguttopbaş

2017

Journal of Central Banking Theory and Practice

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“…In quantity auctions, CBRT announces auction amount daily and then each bank has the right to bid up to the announced liquidity amount. All bids are fulfilled in this method and if total bids exceed announced auction amount, then liquidity is distributed to each bank according to the ratio calculated by multiplying bank's bid amount with the ratio of auction amount divided by total bids (Küçük, Özlü, Talaslı, Ünalmış, & Yüksel, 2014).…”

Section: The Mechanismmentioning

confidence: 99%

“…Banks can borrow from short-term sources other than CBRT in money markets (Ünalmış, 2015). There are two overnight money markets operating under BIST (Küçük et al, 2014;Kara, 2015;Binici et al, 2016). First one is the BIST repo/reverse repo market.…”

Section: The Mechanismmentioning

confidence: 99%

“…In this market, only banks are allowed to make transactions and they are not subject to reserve requirements. Since this market is the largest organized repo market in Turkey (transactions in this market are in the form of repurchase agreement transactions), overnight rate incurring this market is taken as a benchmark for other money market instruments in Turkey (Küçüksaraç & Özel, 2013;Küçük et al, 2014). One other money market from which banks can obtain short term liquidity is cross currency swap market, in which banks which have foreign funds can turn them into Turkish lira to allocate loans denominated in local currency.…”

Section: The Mechanismmentioning

confidence: 99%

“…As it is stated before, in the asymmetric corridor system, short term money market rates can be realized in levels that are quite different from the levels of official interest rates. Küçük et al (2014) investigate the impact of CBRT liquidity policies on the spread between BIST overnight rate and WACF and find that composition, maturity and costs of CBRT funding are effective in determining BIST spread (see Figure 21 for BIST overnight rate and WACF).…”

Section: The Mechanismmentioning

confidence: 99%

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Factors Impacting Bank Net Interest Margin and the Role of Monetary Policy: Evidence from Turkey

Yılmaz

2017

IJFBS

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<p><em>In this study, we investigate factors affecting net interest margin (NIM) of commercial banks in Turkey. Especially, our results highlight the relation between unconventional monetary policy shocks and bank margins. To this end, first, we conduct an identification analysis about which parameters of asymmetric interest corridor framework are important in explaining variations in NIM. Using industry-level data, we show that there exists a pass through from BIST interbank overnight repo/reverse repo market rate and weighted average cost of funding (WACF) to bank loan and deposit rates. As a result of reduced-form Vector Autoregression (VAR) analysis we find the existence of a transmission mechanism from BIST rate and WACF to commercial loan rate, consumer loan rate and deposit rate. Same pass through to loan and deposit rates is also shown in individual bank level with the Panel Vector Autoregression (Panel VAR) analysis in the case of 16 commercial banks in Turkey during the period 2011Q1-2016Q1. After the identification analysis, we examine the relationship between NIM and policy rates through System Generalized Method of Moments (GMM) techniques by controlling bank specific, industry related and macroeconomic factors. We find that a change in the monetary policy rate has significant and positive impact on NIM. Among bank-specific factors, equity ratio and operating expenses are found to be significantly affecting NIM during the sample period. Our empirical findings also stress the significance of lag values of NIM. Estimations conducted with standardized variables indicate that economic significance of lag values and bank specific variables are larger than that of policy.</em></p>

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Interbank market friction-induced holdings of precautionary liquidity: implications for bank loan supply and monetary policy implementation

2019

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We analyse the impact of overnight interbank market frictions on bank loan supply when banks face idiosyncratic liquidity risk and discuss resulting implications for monetary policy implementation. Sufficiently pronounced interbank market frictions imply that banks hold positive or negative precautionary liquidity. Holding positive (negative) precautionary liquidity means that banks hold more (less) liquidity than they expect to need. As holding precautionary liquidity is costly, interbank market frictions negatively influence bank loan supply. However, by means of its standing facilities, the central bank not only offers an alternative to using the interbank market but also determines the costs of friction-induced holdings of positive or negative precautionary liquidity. Therefore, the facilities allow the central bank to influence banks' expected liquidity costs, and thereby their loan supply, so that interbank market frictions need not be an impediment to monetary policy transmission.

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Interest Rate Corridor, Liquidity Management, and the Overnight Spread

Cited by 19 publications

References 18 publications

Perspectives on Monetary Policy and Cost of Capital: Evidence from Turkey

Perspectives on Monetary Policy and Cost of Capital: Evidence from Turkey

Factors Impacting Bank Net Interest Margin and the Role of Monetary Policy: Evidence from Turkey

Interbank market friction-induced holdings of precautionary liquidity: implications for bank loan supply and monetary policy implementation

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