Optimal Reserve Management Pattern for Turkish Banks

In this paper we model a representative bank’s optimal reserve management pattern by adopting institutional aspects of the Turkish required reserve regime. The cost minimization problem, in general, takes into account the expected opportunity cost of holding reserves and penalty costs for not fulfilling the liability of reserve requirement. We extend this problem for reserve carry-over provision and use of late liquidity window facility and compute the optimal reserve pattern by dynamic programming. We show that optimal reserve pattern remains constant during the first week of the maintenance period and has an upward trend especially during the last three days. The analysis of changes in reserve requirements, carry-in amounts, liquidity shocks, policy interest rates, and remuneration of reserves provide some important insight into the commercial banks’ reserve holding behaviors.