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Reserve requirements and financial stability

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  • Glocker, C.

Abstract

This study assesses the effects of reserve requirements on the probability of bank failure and compares them to those of capital requirements. While both requirements affect banks’ balance sheets and lending rates similarly, their effects on financial stability can differ markedly. When adjustment in deposit rates is constrained, the cost effect arising from higher reserve requirements may incentivise banks to choose riskier assets rendering worse financial conditions. Borrowers’ moral hazard problem augments these adverse effects. They are mitigated when considering imperfectly correlated loan-default as higher interest revenues from non-defaulting loans curb losses from defaulting loans.

Suggested Citation

  • Glocker, C., 2021. "Reserve requirements and financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
  • Handle: RePEc:eee:intfin:v:71:y:2021:i:c:s1042443121000056
    DOI: 10.1016/j.intfin.2021.101286
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    More about this item

    Keywords

    Reserve requirements; Liquidity regulation; Capital requirements; Bank failure; Default correlation;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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