Federal Reserve System Requirements, 1959-1988

By Haslag, Joseph H.; Hein, Scott E. | Journal of Money, Credit & Banking, November 1989 | Go to article overview

Federal Reserve System Requirements, 1959-1988


Haslag, Joseph H., Hein, Scott E., Journal of Money, Credit & Banking


Federal Reserve System Reserve Requirements, 1959-1988

Over the last thirty years, the Federal Reserve System frequently has changed both the range of deposit classifications against which reserves must be held, and the level of reserve requirement ratios. Most recently, with passage of the Monetary Control Act of 1980 (hereafter MCA), the Federal Reserve System was given the authority to levy reserve requirements against the reservable deposits held at all depository institutions that offer transactions deposits. Prior to 1980, the Federal Reserve's jurisdiction was limited to member commercial banks.

These historical changes in reserve requirements have been complex enough that it is difficult to determine whether or not reserve requirements have been increased or decreased over time. For example, did the MCA effectively raise or lower required reserves for all depository institutions in the United States? It is generally recognized that the Act, as legislated by Congress, raised reserve requirements for nonmember depository institutions, and lowered them for members.(1) The net effect of these countervailing forces is far from obvious. Toma (1988) claims that "on balance the reserve requirement burden increased" (Toma 1988, p. 717). He does not, however, provide direct evidence to support this claim.(2)

A related issue concerns the coordination between fiscal and monetary policy. There has been a great deal of discussion about the pressure to monetize Federal government debt in light of the sharp increases in recent federal budget deficits. One simple procedure allowing the Federal Reserve to purchase a larger proportion of the government's debt, without leading to large increases in the money stock, would be to raise reserve requirement ratios. With increased reserve requirement ratios, the Federal Reserve can purchase more federal debt without (directly) increasing the money stock. The question addressed is, were Federal Reserve System reserve requirement ratios raised in response to the large federal deficits in the 1980s?

The purpose of this paper is to use the Federal Reserve Bank of St. Louis's reserve adjustment magnitude to examine changes in reserve requirement structures over the last thirty years. Particular attention is devoted to the 1980s and the effects of the MCA.

THE ST. LOUIS RESERVE ADJUSTMENT MAGNITUDE (RAM): A MEASURE OF CHANGES IN AGGREGATE RESERVE REQUIREMENTS

Table 1 provides a list of the Federal Reserve System's reservable deposit classifications and the different reserve requirement ratios for two distinct years: 1978 and 1988. The 1978 reserve requirement structure, which predated the MCA, applied to member banks only. In contrast, the reserve requirement structure in 1988 applied to all depository institutions that offer transactions deposits.

There are a number of factors which make it difficult to infer the net effects of the changes in reserve requirement structures from 1978 and 1988. First, as Table 1 indicates, the reserve requirement ratio which applied to member banks with net demand deposits levels between $0 and $41.5 million was lowered from 1978 levels. Table 1 also shows, however, that the reserve requirement ratios applied to net demand deposit levels for deposit levels between $41.5 million and $100 million were raised slightly. Even if it is conceded that member banks faced lower reserve requirements in 1988 compared with those in 1978, as many suggest, there is the question of nonmember reserve requirements. Nonmember depository institutions faced higher reserve requirements from the passage of the MCA. Without information on the deposit mix, both in terms of deposit size classifications and member versus nonmember deposit holdings, the net effect of the MCA on the system as a whole cannot be determined from Table 1 data alone. Was the net effect, as Toma claims, an increased level of reserve requirements for the whole system? …

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