The Demand for Excess Reserves in the Euro Area and the Impact of the Current Credit Crisis

Abstract

One of the risks that banks need to manage, in their financial intermediation activities, is liquidity risk. Thus, banks hold reserves for precautionary reasons, in order to keep enough cash to meet their obligations. In this work, we analyze the demand for excess reserves by Euro Area banks, since the change in the framework of the single monetary policy in March 2004. Our main conclusions are that there is a positive relationship between the demand for reserves and its financing cost and also that the environment of uncertainty present in the credit crisis is not significant in the demand for excess reserves: the ECB achieved control over the money market tensions.