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The determination of commercial bank reserve requirements

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  • Cara S. Lown
  • John H. Wood

Abstract

Excess reserve ratios have been studied extensively and are believed to be endogenously determined. In contrast, required reserve ratios are conventionally treated as exogenous. However, there are public policy reasons for a positive response of reserve requirements to interest rates. These are opposed by private incentives to secure lower requirements when their cost rises with interest rates. Several kinds of evidence support the hypothesis that reserve requirements are inverse functions of interest rates, sometimes with long lags that reflect the political process. The results also suggest that banks are not passive creatures of regulation but mold their environment.

Suggested Citation

  • Cara S. Lown & John H. Wood, 2003. "The determination of commercial bank reserve requirements," Review of Financial Economics, John Wiley & Sons, vol. 12(1), pages 83-98.
    • Handle: RePEc:wly:revfec:v:12:y:2003:i:1:p:83-98
    DOI: 10.1016/S1058-3300(03)00008-9
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