Abstract
On the Proper Use of Requirement Reserves Requirement reserves were established in France in 1967 only, and have been used since for various purposes. First they were based on deposits, then were extended to credit. From 1972 to 1986, a progressive rate turned them into a penalty, as an auxiliary of credit control system. Together with the regrouping of capital market, they are becoming a tool for monetary policy. Requirement reserves are a means to increase the bank's need for liquidity, as well as the uncertainty about the costs of such needs. In a way they have an effect on banks's credit supply, by prompting them to cut on new credits and seek for non monetary income. In France, their main part was to act on credit cost. They could not actually slow down monetary expansion. Proportional requirement reserves therefore were somewhat forgotten, when in 1985 their rates were increased because of the financial mutation - creation of financial instruments, opening of markets, thanks to which this kind of monetary control became obsolete. The Banque de France intend to use them for two reasons. First of all, they can contribute to the central bank's interest rates policy. On the other hand they contribute to modify the attitude of banks. It can incite them to manage their assets and liabilities (to reduce the amount submitted to reserves, i.e. the monetary income) in a way compatible with the main issues of monetary policy. Credit institutions will have to assess their liquidity by selling securities on secondary markets, and no longer by "refinancing" (which comes down to an indebtment to the central bank). So doing, it helps suppressing money, and diminishing the base of reserves and the demand for money. Through their action on money markets, credit institutions would then back up an open market policy. We haven't reached this point yet. We stand in a transitory situation: indeed even if requirement reserves decline, there are still many instances of them. In the perspective of the european financial market, the main point will be to prevent them from creating unequal competition between different national systems. by selling securities on secondary markets, and no longer by "refinancing" (which comes down to an indebtment to the central bank). So doing, it helps suppressing money, and diminishing the base of reserves and the demand for money. Through their action on money markets, credit institutions would then back up an open market policy. We haven't reached this point yet. We stand in a transitory situation: indeed even if requirement reserves decline, there are still many instances of them. In the perspective of the european financial market, the main point will be to prevent them from creating unequal competition between different national systems.
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