IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v44y2026i1ne70033.html

The impact of eliminating reserve requirements on US banks' lending, liquidity, and profitability during COVID‐19

Author

Listed:
  • Jascha‐Alexander Koch
  • Mohammad Saiful Islam

Abstract

The US Federal Reserve System (Fed) eliminated reserve requirements for banks in March 2020 during the first quarter of the COVID‐19 pandemic to foster bank lending through expansionary monetary policy. However, we find empirical evidence that the reserve requirements elimination was not able to support bank lending but instead increased the liquidity of US banks. Moreover, the reserve requirements elimination increased the overall profitability of banks but decreased the profitability from net interest income as measured by net interest margin. Our study offers guidance for policy‐makers in taking appropriate monetary policy measures during pandemics like the COVID‐19 pandemic.

Suggested Citation

  • Jascha‐Alexander Koch & Mohammad Saiful Islam, 2026. "The impact of eliminating reserve requirements on US banks' lending, liquidity, and profitability during COVID‐19," Review of Financial Economics, John Wiley & Sons, vol. 44(1), January.
    • Handle: RePEc:wly:revfec:v:44:y:2026:i:1:n:e70033
    DOI: 10.1002/rfe.70033
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/rfe.70033
    Download Restriction: no
    File URL: https://libkey.io/10.1002/rfe.70033?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Luu, Hiep Ngoc & Nguyen, Canh Phuc & Nasir, Muhammad Ali, 2023. "Implications of central bank digital currency for financial stability: Evidence from the global banking sector," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    2. Elnahass, Marwa & Trinh, Vu Quang & Li, Teng, 2021. "Global banking stability in the shadow of Covid-19 outbreak," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    3. Zhang, Xuedong & Li, Jinwei, 2025. "The impact of monetary policy instrument innovation on commercial banks' liquidity creation," Finance Research Letters, Elsevier, vol. 73(C).
    4. Wang, Mei Ling, 2023. "Effects of the green finance policy on the green innovation efficiency of the manufacturing industry: A difference-in-difference model," Technological Forecasting and Social Change, Elsevier, vol. 189(C).
    5. Glocker, C., 2021. "Reserve requirements and financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    6. Wei, Xiaoyun & Li, Jie & Han, Liyan, 2020. "Optimal targeted reduction in reserve requirement ratio in China," Economic Modelling, Elsevier, vol. 85(C), pages 1-15.
    7. Demetris Vrontis & Hani El-Chaarani & Sam El Nemar & Hebatallah Badawy, 2024. "Sustainable development of SMEs during the COVID-19 pandemic: a comparative study between developed and developing countries," World Review of Entrepreneurship, Management and Sustainable Development, Inderscience Enterprises Ltd, vol. 20(4), pages 421-450.
    8. Wei, Xiaoyun & Han, Liyan, 2020. "Targeted reduction in reserve requirement ratio and optimal monetary policy in China," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 209-230.
    9. Brei, Michael & Moreno, Ramon, 2019. "Reserve requirements and capital flows in Latin America," Journal of International Money and Finance, Elsevier, vol. 99(C).
    10. Islam, Mohammad Saiful & Koch, Jascha-Alexander, 2024. "Can higher federal funds rates control mortgage lending during periods of high inflation and high house prices?," Finance Research Letters, Elsevier, vol. 67(PA).
    11. Kargin, Sinem & Lamey, Lien, 2025. "The impact of a flagship store opening on firm value: evidence from an event study," Journal of Business Research, Elsevier, vol. 199(C).
    12. 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).
    13. Cañón, Carlos & Margaretic, Paula, 2014. "Correlated bank runs, interbank markets and reserve requirements," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 515-533.
    14. Yun, Youngjin, 2020. "Reserve accumulation and bank lending: Evidence from Korea," Journal of International Money and Finance, Elsevier, vol. 105(C).
    15. Fungáčová, Zuzana & Nuutilainen, Riikka & Weill, Laurent, 2016. "Reserve requirements and the bank lending channel in China," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 37-50.
    16. Temesvary, Judit & Wei, Andrew, 2024. "Domestic lending and the pandemic: How does banks’ exposure to COVID-19 abroad affect their lending in the United States?," Journal of International Money and Finance, Elsevier, vol. 143(C).
    17. Dutkowsky, Donald H. & VanHoose, David D., 2020. "Equal treatment under the Fed: Interest on reserves, the federal funds rate, and the ‘Third Regime’ of bank behavior," Journal of Economics and Business, Elsevier, vol. 107(C).
    18. Hogan, Thomas L., 2021. "Bank lending and interest on excess reserves: An empirical investigation," Journal of Macroeconomics, Elsevier, vol. 69(C).
    19. Yang, Fan & Masron, Tajul Ariffin, 2024. "Role of financial inclusion and digital transformation on bank credit risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    20. repec:eme:mfppss:mf-09-2021-0441 is not listed on IDEAS
    21. Mamatzakis, Emmanuel & Bermpei, Theodora, 2016. "What is the effect of unconventional monetary policy on bank performance?," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 239-263.
    22. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    23. Di Giorgio, Giorgio, 1999. "Financial development and reserve requirements," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1031-1041, July.
    24. Koch, Jascha-Alexander & Islam, Mohammad Saiful, 2024. "Impact of higher federal funds rates on bank risk during higher inflation in the U.S," Finance Research Letters, Elsevier, vol. 60(C).
    25. Glocker, Christian & Towbin, Pascal, 2015. "Reserve requirements as a macroprudential instrument – Empirical evidence from Brazil," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 158-176.
    26. Kuang, Chun & Yang, Jiawen & Zhu, Wenyu, 2024. "Reserve holding and bank lending," Journal of Empirical Finance, Elsevier, vol. 77(C).
    27. Chawwa, Tevy, 2021. "Impact of reserve requirement and Liquidity Coverage Ratio: A DSGE model for Indonesia," Economic Analysis and Policy, Elsevier, vol. 71(C), pages 321-341.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Heitmann, Dennis & Koch, Jascha-Alexander & Islam, Mohammad Saiful & Eva, Sharmin Akter, 2025. "The impact of central bank digital currencies on the financial stability of banks: Dynamic panel estimation," Finance Research Letters, Elsevier, vol. 84(C).
    2. Li, Dan & Sun, Yanyang, 2025. "The impact of inclusive lending support on the performance of small and micro enterprises: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 353-370.
    3. Glocker, Christian, 2019. "Do reserve requirements reduce the risk of bank failure?," MPRA Paper 95634, University Library of Munich, Germany.
    4. Koch, Jascha-Alexander & Islam, Mohammad Saiful, 2024. "Impact of higher federal funds rates on bank risk during higher inflation in the U.S," Finance Research Letters, Elsevier, vol. 60(C).
    5. Islam, Mohammad Saiful & Koch, Jascha-Alexander, 2024. "Can higher federal funds rates control mortgage lending during periods of high inflation and high house prices?," Finance Research Letters, Elsevier, vol. 67(PA).
    6. Chiarella Carl & Di Guilmi Corrado & Zhi Tianhao, 2020. "“Animal spirits” and bank’s lending behaviour, a disequilibrium approach," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(2), pages 1-21, April.
    7. Ruishi Jiang & Jia Ruan, 2023. "Does Direct Monetary Policy Affect the Supply of Bank Credit to Small and Medium-Sized Enterprises? An Analysis Based on Chinese Data," Sustainability, MDPI, vol. 15(15), pages 1-19, July.
    8. Dia, Enzo & VanHoose, David, 2025. "Banking and monetary policy in a monetary union," International Review of Economics & Finance, Elsevier, vol. 99(C).
    9. Lin, Chaoying & He, Lerong, 2020. "Targeted monetary policy and agriculture business loans," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    10. de Moraes, Claudio Oliveira & Cruz, Guilherme, 2023. "What do we know about the relationship between banks and income inequality? Empirical evidence for emerging and low-income countries," Journal of Economics and Business, Elsevier, vol. 123(C).
    11. Fungáčová, Zuzana & Nuutilainen, Riikka & Weill, Laurent, 2016. "Reserve requirements and the bank lending channel in China," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 37-50.
    12. Rizwan, Muhammad Suhail & Ahmad, Ghufran & Qureshi, Anum, 2025. "Central bank digital currency and systemic risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 99(C).
    13. Fegatelli, Paolo, 2024. "Monetary policy and reserve requirements with a zero-interest digital euro," Journal of Macroeconomics, Elsevier, vol. 80(C).
    14. Haddou, Samira & Boughrara, Adel, 2025. "How diversification shapes full-fledged Islamic bank Stability? A causal inference approach," International Review of Economics & Finance, Elsevier, vol. 102(C).
    15. Zhong, Shen & Zhou, Zhicheng & Gao, Wei, 2025. "Impact of regional finance reform and innovation policies on green innovation in pilot cities: A quasi-natural experiment," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 888-911.
    16. Glocker, C., 2021. "Reserve requirements and financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    17. Md Gyasuddin Ansari & Rudra Sensarma, 2023. "The role of liquidity in monetary policy transmission: Evidence from Indian banks," Scottish Journal of Political Economy, Scottish Economic Society, vol. 70(5), pages 439-458, November.
    18. Janko Cizel & Jon Frost & Aerdt Houben & Peter Wierts, 2019. "Effective Macroprudential Policy: Cross‐Sector Substitution from Price and Quantity Measures," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(5), pages 1209-1235, August.
    19. Divino, Jose Angelo & Haraguchi, Carlos, 2022. "Monetary Policy And Reserve Requirements In A Small Open Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 26(4), pages 1073-1106, June.
    20. Philippas, Dionisis & Papadamou, Stephanos & Tomuleasa, Iuliana, 2019. "The role of leverage in quantitative easing decisions: Evidence from the UK," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 308-324.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:44:y:2026:i:1:n:e70033. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.