Fedpoint 45: Reserve Requirements
The Federal Reserve Board used reserve requirements in the same way in 1980 to limit the growth of bank credit (Sellon and Weiner, 1996, p. 7). Reserve requirements were lowered in 1990 to stimulate bank lending. This was the purpose in lowering the reserve requirements again in 1992. The Federal Reserve Board stated that lower reserve requirements would enable banks to give more credit (Fedpoint 45, 1997, p. 4).

The current reserve requirement is low when placed in historical context. This is due to many causes: the low percentage of reserves required; the elimination of required reserves for some types of bank accounts, for example savings accounts; and the creation of new types of accounts designed in a way that they would not be required to have required reserves.

The article explains that central banks use reserve requirements to help control the growth of the economy by regulating the speed at which the money supply can grow. The higher the reserve requirement the slower the expansion of the money supply. With a 10 percent reserve requirement, a deposit can generate a maximum increase in the money supply of ten times the deposit. If the reserve requirement is 20 percent the money supply will only be able to increase at most by five times the initial deposit. The reserve requirement can then be used to help control economic expansion and inflation.

The financial markets have been evolvi

 
 
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