Abstract

On the Role of Interbank Relations

In 1971, the German Bundesbank registered a change in the criteria of the banks for assessing the necessary measure of liquidity, when, unlike in the past, they further expanded credits granted despite a marked reduction of the free liquidity reserves. The Bundesbank believed it had found an explanation for the change in bank behaviour in the simultaneous increase in interbank transactions. These findings gave occasion to determine more precisely the location of interbank relations within the framework of monetary theory. The point of departure is provided by the controversy between the liquidity theory of money and quantity theory. On the one hand there is the question of how far near monies act as money substitutes and influence the circulation velocity of money. Then again, it must be examined whether, say, the quantity of money should not be regarded as an endogenous magnitude, the level of which passively adjusts to the “needs” of the economy. Interbank transactions may increase the degree of utilization of a given monetary base by bringing about a balance between deficits and surpluses of central bank money. An increase in the money-creating capacity of the banking system with the monetary base remaining unchanged occurs also by the transposition of central bank money via interbank relations among banks with different minimum reserve and cash withdrawal rates. The influence of interbank transactions on the level of the monetary base itself is to be found in their quality as substitutes for open-market operations of the central bank; in this connection, particularly the relations between branch or member banks and their respective central institutions also play an important role. The monetary base is expanded when the banks regard interbank claims as good substitutes for recourse to the central bank and consequently take up increased central bank credits. All in all, the conclusion will have to be drawn that the increase in interbank relations in the Federal Republic of Germany from 1970 onwards has brought about, not only an improvement in the liquidity situation of individual banks, but also liquidity creation from the standpoint of the banking system as a whole. A situation in which the free liquidity reserves are approaching zero sets an objective limit to this trend; on the other hand, however, this state of affairs cannot be taken as evidence against the expansive influence of interbank relations on the liquidity situation of the entire banking system.