Minimum Reserve Requirements European Central Bank

The dollar amount of a deposit-taking institution`s reserve requirement is determined by applying the reserve ratios set out in the Committee`s Regulation D (12 CFR Part 204) to an institution`s reservable liabilities (see Table of Reserve Requirements). The Federal Reserve Act empowers the Board to set minimum reserves for operating accounts, non-personal term deposits and euro liabilities. Note: The Board`s Regulation D (Deposit-taking Institutions Reserve Requirements) requires that reserve requirements be met by holding funds from the Consolidated Revenue Fund and, if cash is insufficient, by maintaining a balance in an account with a Federal Reserve Bank. An institution may hold this balance directly with a reserve bank or other institution as part of an intermediary relationship. Reserve requirements apply to “deposit-taking institutions,” defined as commercial banks, savings and credit associations, credit unions, U.S. branches, and agencies of foreign banks, peripheral entities, and procuring entities. The International Banks Act of 1978 required branches of foreign banks operating in the United States to meet the same reserve requirement ratio standards. [8] [9] Most economists dispute the conventional theory of minimum reserves. [2] Criticism of conventional theory is generally associated with endogenous money theories.

The following list contains the regulatory changes to minimum reserves and indexation of the low reserve bracket and exemption from minimum reserves from 1 December 1959, and their impact on minimum reserves. The amount of reserves to be held by each institution is determined by its reserve base. In order to ensure the stabilisation of money market rates, institutions may use averaging requirements to meet reserve requirements. This means that compliance with these requirements is determined on the basis of the average daily reserves held by institutions during the maintenance period, which is usually around six weeks. This allows institutions to mitigate the effects of temporary liquidity fluctuations. In times of structural liquidity constraints, the reserve requirement system helps to stabilise money market interest rates and creates demand for central bank money in the banking sector. Currently, the Eurosystem uses minimum reserves to determine quotas under the two-tier excess reserve remuneration system (see related link in the “More information” section). If you have any questions about minimum reserves and the corresponding administrative procedures, you can contact the branches of the Bank of Italy. An institution that holds reserves in excess of the required amount is called excess reserves.

Information on minimum reserves published under current EU rules is available from major economic information providers (Bloomberg, Thomson Reuters). Reserve requirements are an important part of the central bank`s monetary policy framework. They aim to stabilise money market interest rates and create or increase a structural liquidity deficit. Jaromir Benes and Michael Kummof of the IMF`s research department report that the student economics textbook`s “deposit multiplier,” in which monetary aggregates are created at the initiative of the central bank by an initial injection of high-level money into the banking system multiplied by bank loans, reverses the very functioning of the money transfer mechanism. Benes and Kumhof argue that in most cases where banks request the replenishment of depleted reserves, the central bank is obliged. [3] From this point of view, reserves are therefore not constraints, since the deposit multiplier is, in the words of Kydland and Prescott (1990), a mere myth. According to this theory, private banks almost completely control the process of money creation. [3] The following content explains the Commission`s power to impose minimum reserves and how minimum reserves were managed before the change in reserve ratios to zero.

The Eurosystem requires banks to hold part of their liabilities in the form of deposits in accounts with their national central bank: minimum reserves. This is calculated by applying different reserve ratios to certain categories of liabilities. Compliance with this requirement is determined on the basis of the average daily balances of counterparties` reserve accounts over a reserve maintenance period (6 or 7 weeks). The calendar of maintenance periods is published regularly (see Eurosystem calendars). The rate of return on minimum reserves is linked to the rate of return on the Eurosystem`s main refinancing operations (see section on key ECB interest rates). In the UK, the term clearing banks is sometimes used, referring to banks that have direct access to the clearing system. However, for the sake of clarity, the term commercial banks is used for the remainder of this section. As of March 2020, the reserve requirement for all deposit-taking institutions was abolished or, technically, set at zero per cent of eligible deposits. The board had previously imposed a zero reserve requirement for banks with eligible deposits of $16 million or less, 3 percent for banks up to $122.3 million and 10 percent thereafter.

The elimination of reserve requirements followed the Federal Reserve`s shift to a “traffic light” system, in which Federal Reserve banks pay member banks interest on the reserves they hold in excess of what is required. [6] [7] A list of monetary financial institutions subject to minimum reserves is published by the ECB. In the United States, a reserve requirement[4] (or liquidity ratio) is a minimum value, as determined by the Board of Governors of the Federal Reserve, of the ratio of reserve requirements to a class of deposit liabilities (“net accounts” or “NTAs”) owed by deposit-taking institutions to their clients (for example, commercial banks, including U.S. branches of a foreign bank). Savings banks, savings banks, credit unions). Deposits currently subject to minimum reserves are mainly current accounts.

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