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Lessons from the historical use of reserve requirements in the United States to promote bank liquidity

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Abstract

Efforts in the United States to promote bank liquidity through reserve requirements, a minimum ratio of liquid assets relative to liabilities, extend at least as far back as the aftermath of the Panic of 1837. These requirements were quite important during the National Banking Era. Nevertheless, suspensions of deposit convertibility and liquidity shortfalls continued to occur during banking panics. Eventually, efforts to ensure that banks remained liquid resulted in a shift away from reserve requirements in favor of a central bank able to add liquidity to the financial system. This paper reviews the issues raised in the historical debates about reserve requirements along with some empirical evidence on banks' holdings of reserves, to provide some insights and lessons that are relevant today. A key lesson is that individual bank liquidity during stress periods is inherently and intricately tied to the liquidity policies of the central bank.

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  • Mark A. Carlson, 2013. "Lessons from the historical use of reserve requirements in the United States to promote bank liquidity," Finance and Economics Discussion Series 2013-11, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2013-11
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    1. Liquidity Regulation is Back
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-04-02 11:29:18

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    3. Haelim Anderson & Mark Paddrik & Jessie Jiaxu Wang, 2019. "Bank Networks and Systemic Risk: Evidence from the National Banking Acts," American Economic Review, American Economic Association, vol. 109(9), pages 3125-3161, September.
    4. Glocker, C., 2021. "Reserve requirements and financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    5. Christopher J Curfman & John Kandrac, 2022. "The Costs and Benefits of Liquidity Regulations: Lessons from an Idle Monetary Policy Tool [Crisis resolution and bank liquidity]," Review of Finance, European Finance Association, vol. 26(2), pages 319-353.
    6. Davis, Douglas D. & Korenok, Oleg & Lightle, John P. & Prescott, Edward S., 2020. "Liquidity requirements and the interbank loan market: An experimental investigation," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 113-126.
    7. Mark Carlson & David C. Wheelock, 2018. "Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Contagion Risk?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(8), pages 1711-1750, December.
    8. Calomiris, Charles W. & Carlson, Mark, 2016. "Corporate governance and risk management at unprotected banks: National banks in the 1890s," Journal of Financial Economics, Elsevier, vol. 119(3), pages 512-532.
    9. Glocker, Christian, 2019. "Do reserve requirements reduce the risk of bank failure?," MPRA Paper 95634, University Library of Munich, Germany.
    10. Ben-Gad, Michael & Pearlman, Joseph & Sabuga, Ivy, 2022. "An analysis of monetary and macroprudential policies in a DSGE model with reserve requirements and mortgage lending," Economic Modelling, Elsevier, vol. 116(C).
    11. Christopher Hoag, 2019. "Liquidity and Borrowing from a Lender of Last Resort during the Crisis of 1884," Working Papers 1901, Trinity College, Department of Economics, revised Jul 2019.
    12. Mark A. Carlson & David C. Wheelock, 2014. "Navigating constraints: the evolution of Federal Reserve monetary policy, 1935-59," Working Papers 2014-13, Federal Reserve Bank of St. Louis.
    13. David C. Wheelock, 2015. "Economics and Politics in Selecting Federal Reserve Cities: Why Missouri Has Two Reserve Banks," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 269-288.
    14. Eric Monnet & Miklos Vari, 2019. "Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy," IMF Working Papers 2019/176, International Monetary Fund.
    15. Hoag, Christopher, 2018. "Clearinghouse loan certificates as a lender of last resort," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 215-229.
    16. Douglas J. Elliott & Greg Feldberg & Andreas Lehnert, 2013. "The history of cyclical macroprudential policy in the United States," Finance and Economics Discussion Series 2013-29, Board of Governors of the Federal Reserve System (U.S.).
    17. Aleksandra Maslowska-Jokinen & Anna MatysekJedrych, 2016. "Post-Crisis Regulatory and Supervisory Arrangements – The New ‘Old’ Central Banking," BAFFI CAREFIN Working Papers 1632, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    18. Abiloro, T. O & Ilugbami, J. O., 2023. "Regulatory Institutions and National Economic Development in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(5), pages 1552-1575, May.
    19. Christopher Curfman & John Kandrac, 2019. "The costs and benefits of liquidity regulations: Lessons from an idle monetary policy tool," Finance and Economics Discussion Series 2019-041, Board of Governors of the Federal Reserve System (U.S.).
    20. Mark A. Carlson & David C. Wheelock, 2016. "Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Systemic Risk?," Finance and Economics Discussion Series 2016-059, Board of Governors of the Federal Reserve System (U.S.).
    21. Calomiris, Charles W. & Carlson, Mark, 2017. "Interbank networks in the National Banking Era: Their purpose and their role in the Panic of 1893," Journal of Financial Economics, Elsevier, vol. 125(3), pages 434-453.
    22. Joseph Bitar, 2022. "A note on reserve requirements and banks' liquidity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4837-4852, October.
    23. Asako Chiba, 2022. "Bank capital and liquidity regulation," Journal of Banking Regulation, Palgrave Macmillan, vol. 23(2), pages 120-138, June.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • B00 - Schools of Economic Thought and Methodology - - General - - - History of Economic Thought, Methodology, and Heterodox Approaches

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