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Right, you beat me to it. Captial requirements are there to prevent banks from going insolvent. Reserve requirements are there to prevent the money supply fro
by dfranke 17y ago
Right, you beat me to it. Captial requirements are there to prevent banks from going insolvent. Reserve requirements are there to prevent the money supply from spiraling out of control. These are completely different objectives.
- jplewicke 17y agoThanks for pointing this out. Our problem now is that even with reserve requirements, banks can use securitization to expand the money supply infinitely: http://arxiv.org/abs/0904.1426 http://arxiv.org/abs/0904.1426 . Reserve requirement aren't normally the binding constraints on banks, but they might have helped prevent some pathological situations in the past. The rise of shadow banking has shown that they are no longer a sufficient constraint.