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Scarce Collateral and Bank Reserves

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  • Miquel Faig
  • Gregory Gagnon

Abstract

If collateral for bank loans is scarce and as a result access to secured loans is restricted, the allocation of resources is inefficient. Anticipating future borrowing constraints, individuals over-invest in collateralized types of capital, whereas consumption and investment expenditures are inefficiently low while individuals are borrowing constrained. The dual counterpart of this misallocation of resources is inefficiently low interest rates. In this situation, bank reserves play a positive welfare role by increasing not only bank lending rates, but also, paradoxically, bank deposit rates. As a result, in economies with scarce collateral the optimal reserves requirement ratio is positive.

Suggested Citation

  • Miquel Faig & Gregory Gagnon, 2003. "Scarce Collateral and Bank Reserves," Working Papers faig-03-01, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:faig-03-01
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    References listed on IDEAS

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    Cited by:

    1. Glocker, Christian, 2019. "Do reserve requirements reduce the risk of bank failure?," MPRA Paper 95634, University Library of Munich, Germany.

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    More about this item

    Keywords

    collateral; banking; reserves; borrowing constraint; reserves requirement.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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