chapter  3
26 Pages

Reserve Requirements and the Distribution of Monetary Restraint

Reserve requirements specify the percentage of commercial bank liabilities that must be held at the Federal Reserve regional banks in order to meet demands of depositors or other claims against commercial banks. The requirements obligate a financial institution to place funds in a reserve account at a regional Federal Reserve Bank. Since the reserve accounts yield no interest, financial institutions realize no return on bank assets that serve as reserves. Any profits generated by the investment of the contents of these reserve accounts in government securities is held by the Fed. so reserve requirements redistribute revenue from commercial banks to the regional Federal Reserve Banks. Required reserves therefore function as an implicit tax on the financial institutions to which they apply.