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Wealth effects of reserve requirement reductions in the 1990s on depository institutions

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  • Kenneth S. Bartunek
  • Jeff Madura

Abstract

Reserves banks hold against deposits do not earn interest and hence, represent an implicit tax on deposits. Thus, adjustments to reserve requirements might be expected to influence the value of depository institutions because they would affect the present value of future implicit taxes on the institutions. This paper measures the share price response of banks to two unique reserve requirement adjustments in the early 1990s. The results indicate that not all of the benefit from the reduction in the implicit tax resulting from the lowering of reserve requirements was passed on to depositors and borrowers. The larger banks tended to experience strong favorable valuation effects.

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  • Kenneth S. Bartunek & Jeff Madura, 1996. "Wealth effects of reserve requirement reductions in the 1990s on depository institutions," Review of Financial Economics, John Wiley & Sons, vol. 5(2), pages 191-204.
    • Handle: RePEc:wly:revfec:v:5:y:1996:i:2:p:191-204
    DOI: 10.1016/S1058-3300(96)90015-4
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