Finance, Forex and Investments

Are you for the increase of required reserves for commercial banks?

My Econ teacher told us that by the time I graduate college (2015) the reserve requirement will be .12 rather than .10, do you believe that's going to happen? Why would banks increase it anyway, would that just be a precautionary mechanism? But from what we've learned of monetary policy doesn't increasing RR lead to a decrease of excess reserves which will increase the interest rate, decrease gross private investment, thus lowering RGDP? Thanks in advance.

Public Comments

1. (1) The banks might choose to hold more than the required reserves, but the required reserve ratio is set by the Federal Reserve. (2) The Federal Reserve is not going to increase the reserve ratio, for a number of reasons: (A) Right now, the banks have tons of excess reserve. Changing the reserve ratio would not affect bank behavior at all. http://en.wikipedia.org/wiki/Excess_reserves http://www.ny.frb.org/research/staff_reports/sr380.pdf (B) There have been no problems associated with lack of reserves on the part of banks that had reserve requirements. For example, most of the mortgages that helped cause the housing crisis came from the shadow banking system, which is not regulated by the Fed and has no reserve requirements http://en.wikipedia.org/wiki/Shadow_banking_system Similarly, the swaps that triggered the bank meltdowns were also not included in the required reserve system. (3) I am against the increase of required reserves for commercial banks because: (A) It would just be a PR exercise. (B) What is really needed is much better regulation of leverage throughout the banking system (including shadow banks, investment banks, etc.) (C) And as long as more than half of all loans come from non-regulated sources, increasing the reserve requirements hurts the commercial banks to no benefit.