The Effects of Lagged Reserve Requirements on the Reserve Adjustment Pressure on Banks

Abstract

Regulations on commercial banks can be evaluated from two perspectives: their effects on commercial banks and their effects on the transmission of monetary policy actions to aggregate economic activity. This paper analyzes the influence of reserve on reserve management of a commercial bank, and shows that the pressure on a bank to adjust its reserves to unanticipated deposit flows is greater under reserve than under the previous reserve regulations. The influence of reserve on the transmission of monetary policy actions is another issue; the literature on that issue is discussed in the last section of this paper. In September 1968 the Board of Governors of the Federal Reserve System introduced new procedures for calculating the required reserves of member banks. Previously required reserves of member banks for a reserve settlement period were a specified fraction of their deposit liabilities during the same period.' The new procedure computes them as a fraction of the average deposit liabilities of the settlement week two weeks earlier. Another change that went into effect at the same time permits member banks to carry over to the next reserve settlement period excesses or deficiencies in their reserves from the current period (up to two per cent of required reserves for the current settlement period). The reserve accounting procedures prior to September 1968 are referred to as coincident reserve requirements in this paper, and the new procedures are referred to as lagged reserve requirements. By adopting reserve requirements, the Federal Reserve Board sought to make management of reserves by member banks less difficult. According to the official statement of the Board of Governors: