The Bank for International Settlements published a working paper finding that banks’ excess demand for central bank reserves is shaped primarily by payment flow volatility and the functioning of interbank markets. Using weekly reserve choices and granular data for 27 Swedish banks from March 2023 to May 2025, the study finds no robust evidence that the liquidity coverage ratio increases excess reserve demand. Banks active in interbank markets held more reserves when their payment flows were more volatile, borrowing was more expensive and overall market activity was lower. Banks that did not participate in interbank markets maintained larger and more persistent balances, creating pockets of reserves that were not redistributed. Banks held an average SEK 140 billion in the Riksbank’s deposit facility and collectively forwent an estimated SEK 2.25 million a day by keeping reserves there rather than investing them in higher yielding Riksbank certificates. The findings indicate that demand driven floor systems may sustain elevated reserve demand where holding costs are low and interbank markets are fragmented. The paper identifies counterparty operational readiness, stronger price incentives to reduce idle balances and measures addressing stigma around central bank standing facilities as relevant to the effective operation of such frameworks.
2026-09-07Bank for International Settlements
Bank for International Settlements study finds interbank market fragmentation drives banks’ excess reserve demand
A Bank for International Settlements study finds that payment volatility, borrowing costs and interbank market fragmentation are key drivers of banks’ excess reserve demand. Banks outside interbank markets held larger and more persistent balances, while the study found no robust effect from liquidity regulation. The results suggest demand driven floors may sustain elevated reserve holdings where opportunity costs are low and money markets are thin.