Reserve Requirements, the Maturity Structure of Debt, and Bank Runs
IMF Working Papers, April 1, 2008
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Bibliographic details
- Authors: Eza Ghassan Al-Zein
- Published: April 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451869682.001
Summary and theoretical setup
- Paper examines the relationship between reserve requirements and the choice of the maturity structure of external debt in a general equilibrium setup, incorporating the role of international lenders.
- A date- and maturity-specific reserve requirement is defined as a fraction of the debt to be deposited in a non-interest bearing account at the central bank. At maturity, the central bank returns the reserves.
- There exist some specific combinations of date- and maturity-specific reserve requirements that reduce the vulnerability to bank runs.
- Under those combinations, international lenders may still want to provide new short-term lending to the bank after a bank run.
Key findings
- Specific date- and maturity-specific reserve requirement schedules can mitigate fragility associated with short-term external debt.
- Reserve requirements operate by requiring a fraction of debt to be parked in a non-interest bearing central bank account until maturity, affecting incentives for roll-over and lender behavior.
- Even when vulnerabilities are reduced, the model allows for continued provision of new short-term lending by international lenders in the aftermath of a bank run under some parameter combinations.
Policy implications and interpretation
- Carefully designed date- and maturity-specific reserve requirements can be a tool to reduce the probability or severity of bank runs tied to the maturity structure of external debt.
- Policymakers should consider maturity- and date-specific calibration of reserve requirements as part of a broader framework addressing short-term external borrowing and cross-border lender behavior.
Publication and metadata
- Author: Eza Ghassan Al-Zein
- Date: April 1, 2008
- Series: Working Paper No. 2008/108
- Issue: 108
- Volume: 2008
- Pages: 26
- DOI: https://doi.org/10.5089/9781451869682.001
- Stock No: WPIEA2008108
- ISBN: 9781451869682
- ISSN: 1018-5941
- Subjects: Banking, Bonds, Capital controls, Real interest rates, Reserve requirements
- Keywords: bank run, real interest rate, short-term debt, WP
IMF Working Papers — Reserve Requirements, the Maturity Structure of Debt, and Bank Runs (Eza Ghassan Al-Zein, April 1, 2008).