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

Sellon, G. H. Jr., & Weiner, S. E. (1996). Monetary policy without reserve requirements: Analytical issues. Economic Review, 81(4), 5-24.

Analysis of Fedpoint 45: Reserve Requirements

Schlesinger, J. M. (1997, May 9). Greenspan is ready to increase rates if the growth in demand doesn't slow. Wall Street Journal, p. A2.

Banks do not like to hold money in accounts which are subject to reserve requirements. The article gives a clear explanation of the reasons for this dislike. The Federal Reserve Bank does not pay interest on required deposits made by banks. Banks pay a cost, in lost revenue, to hold required reserves above the amount that they would hold without being required by law. This is similar to being taxed on the amount of deposits they hold in these types of accounts. The article neglects to mention another type of account, a clearing balance account, a bank can hold at the Federal Reserve Bank which does pay implicit interest in the form of reduced charges to clear transactions through the Federal Reserve payment system (Sellon and Weiner, 1996, p. 21). These accounts function in many ways like required reserves but are not mandated.

ng. The desire to avoid reserve requirements has led to the creation of new types of financial accounts which do not have reserve requirements. Two of these are Certificates of Deposit (CDs) and Sweeps accounts. Sweeps accounts have only existed since 1994. These accounts automatically transfer money out of accounts with reserve requirements, like checking accounts, to accounts without required reserves such as money market accounts (Sellon and Weiner, 1996, p. 10). This lowers the amount of money in banks which is subject to reserve requirements and lessens the impact the Federal Reserve Board can have on monetary policy when it changes reserve requirements.

The article gives definitions of terms in l