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The most obvious, direct lever is they set the reserve requirement ratio. The bank isn't going to make the loan if they don't have the reserve. The next mecha
by jnwatson 4y ago
The most obvious, direct lever is they set the reserve requirement ratio. The bank isn't going to make the loan if they don't have the reserve.
The next mechanism is setting the Fed funds rate and discount rate. That will very directly incentivize the bank to loan more or less money.
The third is the ability to buy whatever asset it deems necessary to support the economy. Quantitative easing almost directly impacts money supply.
- CraigJPerry 4y ago>> they set the reserve requirement ratio No that doesn't exist anymore: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm >> The bank isn't going to make the loan if they don't have the reserve The bank has unlimited reserves since the central bank will issue reserves via the discount window in unlimited quantities. Loan making is capital constrained, not reserve (or deposit!) constrained. >> That will very directly incentivize the bank to loan more or less money No. This is ignoring what's happened over the past 14 years. >> Quantitative easing almost directly impacts money supply Again - this is a statement that isn't supported by what we've seen happen since the GFC.
- bubbleRefuge 4y agoreserve requirements are based on deposits/liabilities. Capital requirements are what allows or disallows a bank from making loans.
- HWR_14 4y agoCapital requirements (which is what Silvergate ran afoul of) have replaced reserve requirements. They function similarly, only instead of the amount of loans being determined by deposits they are determined by shareholder equity.