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People read “reserve requirements have gone to zero” (which is true) and assume it is so that banks can keep lower reserves. In fact, reserve requirements beca
by NovemberWhiskey 4y ago
People read “reserve requirements have gone to zero” (which is true) and assume it is so that banks can keep lower reserves.
In fact, reserve requirements became meaningless because banks had (and continue to have) so much more in reserves than they were ever required to have under the prior system.
- hgomersall 4y agoAnd they can get reserves whenever they need to, because that's how the interest rate policy is effected.
- ric2b 4y agoI don't understand this, could you clarify? If they have so much more money than the requirements demand, what is the point of lowering the requirements? Who does it help?
- NovemberWhiskey 4y agoThe point wasn’t that reserve requirements were “lowered”; they were removed - because the Fed moved to a different mechanism to set short-term interest rates. If banks choose to keep lots of reserves (because you’re paying interest on them), it’s hard to change the willingness of banks to lend by changing the reserve requirement, right? In economic terms, the supply of reserves is meeting the demand curve for reserves in an inelastic region. So the Fed decided to announce a new approach; the so-called “ample reserves regime” where short term interest rate control would be achieved by administered rates rather than by the reserve requirements of the “limited reserves regime” that went before. If this sounds very far from the quotidian business of deposit taking and loan making: that’s because it is.