Automated teller machine
Certificate of deposit
European Central Bank
Federal funds rate
Government sponsored enterprise IOAR Interest on agreed reserves
Interest on agreed reserves
Interest on excess reserves
Interest on required reserves Libor London Interbank Offered Rate OMO Open market operations
London Interbank Offered Rate
Open market operations
Reserve maintenance period
Sterling overnight interest average
Unremunerated required reserves
La Conducción de la Política Monetaria del Banco de México a través del Régimen de Saldos Acumulados 1995–2003. www.banxico.org.mx/polmoneinflacion/didactico/regimenPM/notasTec/SaldosAcumulados.pdf
Kovanen, Arto: 2002, “Reserve Requirements on Foreign Currency Deposits in Sub–Saharan Africa—Main Features and Policy Implications,” IMF WP/02/65.
Appendix I. Impact of Reserve Requirements on Interest Rate Spreads
Appendix II. Reserve Requirements and Liquidity
Appendix III. The European Central Bank Reserve Base and Reserve Ratios
Appendix IV. Bank of England Definition of Eligible Liabilities
Appendix V. United States Reserve Requirements
Appendix VI. Use by Chile of Reserve Requirements on Foreign Exchange Inflows
Appendix VII Reserve Requirement Levels
For instance, historically when central bank reserve creation had to be backed by gold, or in a currency board system.
Currency in issue is currency in circulation outside the banking system, plus vault cash held by the commercial banks (and sometimes coin, which may be issued by the central bank or the government).
In most economies economic agents will also make substantial use of non–central bank money—transfers of balances held at commercial banks, effected electronically, or in paper form (checks); or the banknotes issued by a foreign central bank (“dollarization”).
Both notes issued—before note issuance became a central bank monopoly—and deposits were liabilities of the commercial bank, which in principle could be converted into gold (‘specie’) on request.
See for instance “Reserve Requirements: History, Current Practice, and Potential Reform” in the June 1993 Federal Reserve Bulletin, p. 572 et seq.
“A good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times.” At the time he was writing, the Bank of England was de facto the reserve bank (it held gold reserves for the banking system as a whole), but de jure was a private bank with no legislative authority over the system.
Individual commercial banks would not be expected to hold foreign exchange reserves against a country’s wider balance of payments needs; this is more properly a central bank function. That said, the recent international financial crisis may suggest that if commercial banks make substantial use of foreign borrowing, there is a need for foreign currency reserves to protect against a ‘drain arising from internal discredit’, since the domestic central bank cannot lend foreign exchange freely in the same way that is can with its domestic currency.
An outflow of gold could force a contraction in lending, as happened in some countries in the 1920s and early 1930s.
Under a currency board system, domestic currency lending may be constrained by RRs; but foreign currency lending is not. The ‘barbarous relic’ (Keynes, “A tract on monetary reform”) of limiting credit to a multiple of available gold is history. [“If we restore the gold standard, are we to return also to the pre–war conceptions of bank–rate, allowing the tides of gold to play what tricks they like with the internal price level, and abandoning the attempt to moderate the disastrous influence of the credit cycle on the stability of prices and employment?.... Advocates of the ancient standard do not observe how remote it now is from the spirit and the requirements of the age. A regulated non–metallic standard has slipped in unnoticed. It exists.”].
If the market expected the central bank OMO to undersupply market needs, the OMO rate would be bid up.
In early 2008, China, India, and Saudi Arabia were among those countries where RR were raised against a background of a managed or fixed exchange rate and rising inflation.
Assuming there is a structural liquidity shortage, so that the market has to borrow from the central bank.
The 2010 IMF survey showed 9 out of 121 central banks which responded had no reserve requirement: Australia, Canada, Denmark, Mexico, New Zealand, Norway, Sweden, Timor–Leste, and the United Kingdom; additionally, the Hong Kong Monetary Authority does not impose RR.
For instance “The interest rate paid on required reserve balances is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate paid on excess balances is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy.” See U.S. Federal Reserve Board of Governors website.
Strictly speaking, a floor to the rate on overnight transactions between banks which have ready access to remuneration at the IOER rate. Banks trading in offshore U.S. dollar markets, for instance, might not have reserve accounts at the Fed, and so could not access its IOER.
Interest on required reserves (IORR) or on agreed reserves (IOAR) do not set a floor as they are not marginal rates.
In the United Kingdom, the Bank of England suspended voluntary reserves targets in March 2009 and remunerates all reserves at the Bank Rate. Remuneration rates on required and excess reserves in the United States were unified from December 2008; GSE reserve balances in the USA are not remunerated.
The 5bp spread over IOER is small. Not all United Kingdom banks have reserve accounts at the central bank, so that Bank Rate does not set a floor even for interbank rates; and some very large transactions with a small spread may influence the average rate (a 5bp marginal return on GBP1 million amounts only to GBP1.37, so that an overnight transaction on less than GBP10 million would scarcely cover the administration costs of undertaking a deal for a marginal gain of 5bp).
If some banks care more about profits than short–term interest rate volatility, they would have an incentive to economize on reserve holdings; whereas the central bank may care more about removing noise from short–term interest rates – because this should make the monetary policy signal clearer and more effective – and may therefore want to structure its operations in such as way as to deliver this. There may be no conflict between the two: Australia and Canada have for some time—pre–crisis—observed virtually zero overnight rate volatility.
It would clearly not make sense to set IOER above an OMO lending rate or the credit SF rate.
Dollarization is taken to mean the use of any non–domestic currency, rather than the use of the U.S. dollars per se.
The ECB rules indicate: “Liabilities vis–à–vis other institutions included in the list of institutions subject to the Eurosystem’s minimum reserve system and liabilities vis–à–vis the ECB and the national central banks are not included in the reserve base.”
The ECB rules indicate: “for the liability category ‘debt securities issued,’ the issuer needs to be able to prove the actual amount of these instruments held by other institutions subject to the Eurosystem’s minimum reserve system in order to be entitled to deduct them from the reserve base.”
The U.S. Fed used a contemporaneous system from February 1984 to July 1998.
Japan and Korea still uses a semi–lagged RR system.
In some countries, requiring a daily average would constitute an excessive administrative burden on banks. Note that using a daily average does not mean that banks have to report daily; they could report the daily average once every two weeks, or once a month.
The USA and Switzerland are unusual amongst advanced economies in including vault cash.
“The argument in favor of making cash an eligible asset can be turned around: of two banks with the same amount of deposits, there is no reason to favor the one that chooses to engage in cash–intense business to obtain deposits.” [Hardy, 1993]. Bagehot, in ‘Lombard Street’ suggests vault cash is “as much as part of [a bank’s] daily stock in trade as its desks or offices” and should not therefore be considered a reserve.
In fact, in many countries non–banks are not allowed to buy central bank bills.
This issue was explored in depth in Ize (2005).
“From a fiscal perspective, zero remuneration is almost certainly not optimal: zero remuneration implies a tax that varies with the nominal interest rate, which is at best imperfectly controlled and cannot readily be set at the level that is optimal from an efficiency point of view.” [Hardy, 1993].
The band is +/− USD 25,000 or 2 percent of the target. Credits were calculated as a proportion (80 percent) of the moving average of 3 month Treasury bill yields.
AFR – Africa; APD – Asia–Pacific; EUR – Europe; MCD – Middle East and Central Asia; WHD – Western Hemisphere.
If the period is set to end on the first Wednesday of the each month, then depending on the calendar the RMP will vary between four and five weeks throughout the year.
Argentina introduced a 3 month averaging period to cover the year end—when liquidity management in most countries is more difficult than normal.
Meetings of the Governing Council and the Monetary Policy Committee respectively.
“The Bank seeks to provide sufficient reserves via its OMOs to enable reserves scheme members in aggregate to accumulate reserves evenly from week to week over the maintenance period. If the Bank over or under–provides reserves because of an error in its liquidity forecast, it makes an adjustment in the subsequent scheduled short–term OMO within the maintenance period, including if necessary the routine fine–tuning OMO on the final day of the maintenance period.” Bank of England Red Book, January 2008—www.bankofengland.co.uk/markets/money/publications/redbookjan08.pdf.
Exchange Settlement Accounts (ESA) balances.
See Regulation ECB/2003/9. Further information relating to the standardized deduction ratio can be found on the ECB’s website (www.ecb.int), as well as on the Eurosystem websites.
For institutions allowed to report statistical data as a group on a consolidated basis according to the provisions of the reporting framework for the ECB’s money and banking statistics, only one such allowance will be granted to the group as a whole, unless the institutions provide data on the reserve base and reserve holdings in a sufficiently detailed manner to enable the Eurosystem to verify their accuracy and quality and to determine the respective reserve requirement of each individual institution included in the group.
If an institution has no head office in a Member State in which it is established, it has to designate a principal branch which would then be responsible for fulfilling the aggregate minimum reserve requirements of all the establishments of the institution in the relevant Member State.