Saying Goodbye to the Reserve Requirements

While many people have been discussing the deficient racing bailouts, or the many fed open market operations, a less discussed occurrence is the end Reserve Requirements. Reserve requirements, are a regulation that the Federal Reserve puts in place that mandates the amount of liquidity that banks must hold relative to their total liabilities and has been a useful tool for preventing bank collapse.  While the reserve requirement as a tool, has a long and storied history dating back to the early 1900s, its status as a mandatory regulation is as recent as the 1980s. So in some ways the end to this classic component of macro classes across the country is not as monumental change as it might seem (still, to me a 23 year old 40 seems like a lot). While it may seem as though this change was solely due to the current COVID crisis at hand, it may also have been an inevitable situation arising due to the aftermath of the 2008 financial crisis. After 2008 banks had been voluntarily holding more reserves, as they hoped to avoid the fate of too-big-to-fail financial giants such as Lehman Brothers. These excess reserves mean that eliminating the required reserve ratio would not have the same effect that we would have seen had this been done in the past. As well the elimination could be in part due to a difference in philosophy of the most recent Fed chairs (Yellan, Powell) vs. (Greenspan & Volcker). Whatever the reason, or combination of reasons, this year we bid farewell to reserve requirements in the United States.

About Brennan

Brennan is a fourth year economics major at the University of Puget Sound.

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