Appendix: Reserve requirement and transfer price

Let us assume that:

D= deposits
d= deposit rate
r= central bank reserve requirement (in percentage of deposits)
R= reserves with the central bank (R = r × D)
IA= interbank assets
i= interbank rate

Then we have:

Central bank reserves + interbank assets = deposits

Interest margin = revenue – expenses

R + IA = D

IA = D – R

Interest margin=(i × IA) – (d × D) = i × (D – R) – (d × D)
  = [i × (D – r × D)] – (d × D)
  = i × (1 – r) × D – (d × D)

The transfer price is the matched-maturity interbank rate adjusted by the central bank’s reserve requirement (i × (1 – r)).

Exercise: Stage Five
Q1:Here is the balance ...

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