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Document Type

Case Study

Case Series

Reserve Requirements

JEL Codes

G01, G28

Abstract

The devaluation of the Mexican peso in December 1994 sparked concerns about the quality and safety of government debt across Latin American countries, including Argentina. In late 1994 and 1995, Banco Central de la Republica Argentina (BCRA) implemented three changes in reserve requirement policy to restore liquidity throughout the financial system and defend the currency peg to the US dollar. First, it lowered the existing minimum reserve requirement, which required banks to hold reserves entirely in cash (pesos or US dollars). This released more than ARS 4 billion (USD 4 billion) in resources into the banking system, according to the Argentine government. Second, it imposed a “safety net” reserve requirement in US dollars (USD) to expand liquidity to banks that needed it. Third, it replaced the cash requirement with a Minimum Liquidity Requirement (MLR) that banks could satisfy with a range of highly liquid assets. Some conclude that the adoption of the MLR helped to strengthen the financial system’s resilience to volatility in the market.

Date Revised

2022-12-22

COinS