Banks have a private motive to hold some level of cash and liquid reserves, but the negative externalities of bank runs create a public interest in setting a regulatory level higher than the privately optimal level. We can think of such reserve requirements (RRs) as the original form of liquidity regulation. In this paper, we focus on 14 cases in which central banks adjusted RRs after crises hit, typically to deal with liquidity shortages in the banking system. We observe that RR adjustments have several advantages in a crisis: (1) such changes require little process, and the change for banks can be quick; (2) stigma concerns may be much lower than with emergency lending operations; (3) RRs can be used to fine-tune incentives for holding various types and maturities of assets; and (4) RR easing can complement a central bank’s other liquidity support programs.
Rhee, June; Mott, Carey K.; Feldberg, Greg; and Metrick, Andrew
"Reserve Requirements Survey,"
Journal of Financial Crises: Vol. 4
Iss. 4, 133-149.
Available at: https://elischolar.library.yale.edu/journal-of-financial-crises/vol4/iss4/5
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