The double-faced demand for bank reserves and its implications

Article by Mr Claudio Borio, Head of the Monetary and Economic Department of the BIS, Mr Piti Disyatat, Assistant Governor, Monetary Policy Group, Bank of Thailand and Mr Andreas Schrimpf, Head of Financial Markets, Monetary and Economic Department, BIS, in VoxEU.org, published on 15 February 2024.

As they have engaged in quantitative easing, central banks have fundamentally adjusted their approach to influencing short-term market rates, shifting from scarce reserve systems to abundant reserve systems. This column argues that the shift has fundamentally altered the properties of the demand for reserves. While in a scarce reserve system reserves only serve as settlement medium, in an abundant reserve system they also become a store of value. This makes the demand for reserves partly endogenous to its supply and has material implications for the predictability of that demand, for how reserves influence the constellation of market rates, and for any transition back to a scarce reserve system. These issues are especially important as central banks evaluate the merits of the two systems and how best to implement policy.