-
- Aboutthe NewYorkFed
- What We Do
- Communities We Serve
-
More About Us
-
At the New York Fed, our mission is to make the U.S. economy stronger and the financial system more stable for all segments of society. We do this by executing monetary policy, providing financial services, supervising banks and conducting research and providing expertise on issues that impact the nation and communities we serve.
The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
Do you have a request for information and records? Learn how to submit it.
Learn about the history of the New York Fed and central banking in the United States through articles, speeches, photos and video.
-
- Markets & Policy Implementation
-
- Reference Rates
- Effective Federal Funds Rate
- Overnight Bank Funding Rate
- Secured Overnight Financing Rate
- SOFR Averages & Index
- Broad General Collateral Rate
- Tri-Party General Collateral Rate
- Desk Operations
- Treasury Securities
- Agency Mortgage-Backed Securities
- Repos
- Reverse Repos
- Securities Lending
- Central Bank Liquidity Swaps
- System Open Market Account Holdings
- Primary Dealer Statistics
- Historical Transaction Data
-
- Monetary Policy Implementation
- Treasury Securities
- Agency Mortgage-Backed Securities
- Agency Commercial Mortgage-Backed Securities
- Agency Debt Securities
- Repos & Reverse Repos
- Securities Lending
- Discount Window
- Treasury Debt Auctions & Buybacks
as Fiscal Agent - INTERNATIONAL MARKET OPERATIONS
- Foreign Exchange
- Foreign Reserves Management
- Central Bank Swap Arrangements
- ACROSS MARKETS
-
- Economic Research
- U.S. Economy
- Consumer Expectations & Behavior
- Growth & Inflation
- Equitable Growth Indicators
- Multivariate Core Trend Inflation
- New York Fed DSGE Model
- New York Fed Staff Nowcast
- R-star: Natural Rate of Interest
- Labor Market
- Financial Stability
- Corporate Bond Market Distress Index
- Outlook-at-Risk
- Treasury Term Premia
- Yield Curve as a Leading Indicator
- Banking
- RESEARCHERS
-
- Financial Institution Supervision
- Bank Applications
-
As part of our core mission, we supervise and regulate financial institutions in the Second District. Our primary objective is to maintain a safe and competitive U.S. and global banking system.
The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
Need to file a report with the New York Fed? Here are all of the forms, instructions and other information related to regulatory and statistical reporting in one spot.
The New York Fed works to protect consumers as well as provides information and resources on how to avoid and report specific scams.
-
- Financial Services & Infrastructure
-
The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
The growing role of nonbank financial institutions, or NBFIs, in U.S. financial markets is a transformational trend with implications for monetary policy and financial stability.
The New York Fed offers the Central Banking Seminar and several specialized courses for central bankers and financial supervisors.
-
- Community Development &Education
-
Community Development
-
We are connecting emerging solutions with funding in three areas—health, household financial stability, and climate—to improve life for underserved communities. Learn more by reading our strategy.
The Economic Inequality & Equitable Growth hub is a collection of research, analysis and convenings to help better understand economic inequality.
The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
Economic Policy Review Executive Summary
Are Reserve Requirements Still Binding?
| Recapping an article from the May 2002 issue | | ||
| of the Economic Policy Review, Volume 8, Number 1 | View full article  | ||
| 16 pages / 573 kb | |||
| Authors: Paul Bennett and Stavros Peristiani | Disclaimer | ||
| Index of executive summaries |
| Overview The authors present evidence that reserve requirements now constrain commercial banks and other depository institutions to a much smaller degree than in the past. They attribute the diminished force of the requirements largely to the spread of "sweep" arrangements—a banking innovation that allows depository institutions to shift funds out of customer accounts subject to reserve requirements. The authors then argue that as reserve requirements have become less binding, banks have been able to economize on the vault cash holdings that they use to satisfy a large part of these requirements. Indeed, banks now appear to be managing their cash flows more in accordance with business needs than with regulatory obligations. Background The Federal Reserve requires banks and other depository institutions to hold a minimum level of reserves against their liabilities. Currently, the marginal reserve requirement equals 10 percent of a bank's demand and checking deposits. Banks can meet this requirement with vault cash and with balances in their Federal Reserve accounts. Neither of these assets earns interest, however, so banks have an incentive to minimize their holdings. Since the beginning of the last decade, required reserve balances have fallen dramatically. The decline stems in part from regulatory action: the Federal Reserve eliminated reserve requirements on large time deposits in 1990 and lowered the requirements on transaction accounts in 1992. But a far more important source of the decline in required reserves has been the growth of sweep accounts (chart). In the most common form of sweeping, funds in bank customers' retail checking accounts are shifted overnight into savings accounts exempt from reserve requirements and then returned to customers' checking accounts the next business day. Largely as a result of this practice, today only 30 percent of banks are bound by a reserve balance requirement (chart). Argument and Methodology The authors undertake to show that reserve requirements are ceasing to bind banks. They find evidence of this development in the fact that required reserve balances have been declining as a proportion of banks' Federal Reserve accounts (chart). Banks are increasingly relying on vault cash to meet their total reserve requirements, with the result that applied vault cash holdings now represent the far largest share of reserves. "Clearing balances"—balances that banks maintain at the Federal Reserve to earn credits that can be used to pay for check clearing, funds transfer, and other Fed services—also now exceed aggregate required reserve balances. As further evidence of the reduced force of reserve requirements, the authors cite the recent behavior of intraday federal funds rate volatility. Banks trying to meet reserve requirements, or to shed unexpectedly large excess reserve positions, typically contribute to increased volatility in the federal funds market on the last day of the reserve calculation period. The fact that volatility on these "settlement" days has diminished relative to the average on other days suggests that an increasing number of banks may be free of reserve requirement constraints. The authors then argue that the ability to sweep away reserve requirements has influenced the way that banks manage their vault cash. Since cash earns no interest, banks not bound by reserve requirements will choose to economize on their holdings of this asset. Thus, the authors hypothesize, "unbound" banks should hold smaller vault cash inventories than "bound" banks and be more aggressive in adjusting their inventories to reflect changes in market interest rates and the currency needs of customers. To test this hypothesis, the authors construct an empirical model of the relationship between banks' vault cash balances and some key determining variables. The federal funds rate is used as a measure of the opportunity cost (that is, forgone interest) of holding cash; growth in transaction deposits serves as a proxy for changes in customer demand for cash services. The model results confirm that bound and unbound banks manage their cash inventories differently. For every percentage point increase in the federal funds rate, the vault cash holdings of unbound institutions decline by 1.8 percent. Although bound banks show some sensitivity to interest rates, unbound banks react more sharply to interest rate changes. Similarly, unbound institutions show the greatest sensitivity to changes in customer demand, significantly increasing their vault cash to accommodate increases in transaction deposits. By estimating the vault cash model separately for three subperiods—1984-89, 1990-93, and 1994-98—the authors find strong evidence that banks over the last decade became increasingly sensitive to the economic costs of holding cash. This finding supports the authors' contention that lower reserve requirements and the availability of sweeps programs in the 1990s have encouraged banks to manage their vault cash inventories more efficiently. Findings Bennett and Peristiani document the diminishing force of reserve requirements, observing that these requirements are "no longer . . . as important a constraint on banks' holdings of assets that qualify as reserves." Banks now appear to be managing their cash inventories less to comply with regulatory minimums than to meet business needs. More specifically, banks appear to be actively regulating their inventories to respond to changes in customer demand and the opportunity costs of holding cash. The authors conclude their analysis by suggesting that a reassessment of U.S. reserve requirements may be in order. With banks becoming increasingly adept at managing their vault cash and Fed account balances to achieve competitive returns, reserve requirements that rely on pricing incentives might be a sensible alternative to the current system. |
| Sweeps surged between 1995 and 2000. |
| Sweeps of Retail Transaction Deposits into Savings Deposits |
 Source: Board of Governors of the Federal Reserve System. |
| Back to the text |
| The proliferation of sweep accounts has significantly reduced the percentage of banks required to maintain reserve balances. |
Proportion of Commercial Banks Bound Source: Board of Governors of the Federal Reserve System, Report of Transaction Accounts, Other Deposits and Vault Cash (FR 2900). |
| Back to the text |
| Required reserve balances declined sharply in the 1990s as vault cash holdingsrose. |
Components of Reserve and Account Balances at the Fed Source: Board of Governors of the Federal Reserve System. |
| Back to the text |
| Commentary on article by James A. Clouse |
| Back to the top |
| Disclaimer |
| The views expressed in this article are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. |
By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.
