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Understanding the cost difference between intraday and overnight liquidity

Author

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  • Bhattacharya, Joydeep
  • Haslag, Joseph H.
  • Martin, Antoine

Abstract

In most countries, the cost of reserves intraday is very close to zero. Many central banks, including the European Central Bank (ECB), the Bank of England, or the Swiss National Bank allow collateralized intraday borrowing at no cost. In the U.S., banks are allowed to incur uncollateralized daylight overdrafts for which they incur a small fee2. In contrast, most countries rely on a positive marginal cost of overnight reserves for the implementation of their monetary policies. In the Euro Area, the cost is at least as large as the difference between the policy rate and the rate the ECB pays on reserves deposited by banks, which is 100 basis points. In the U.S., the cost corresponds to the Fed funds target, since the Fed does not pay interest on reserves.

Suggested Citation

  • Bhattacharya, Joydeep & Haslag, Joseph H. & Martin, Antoine, 2008. "Understanding the cost difference between intraday and overnight liquidity," ISU General Staff Papers 200811010700001825, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:200811010700001825
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    Cited by:

    1. Jurgilas, Marius & Žikeš, Filip, 2014. "Implicit intraday interest rate in the UK unsecured overnight money market," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 232-254.

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    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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