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Reserve requirements and financial stability

Christian Glocker

Journal of International Financial Markets, Institutions and Money, 2021, vol. 71, issue 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.

Keywords: Reserve requirements; Liquidity regulation; Capital requirements; Bank failure; Default correlation (search for similar items in EconPapers)
JEL-codes: E43 E58 G21 G28 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:71:y:2021:i:c:s1042443121000056

DOI: 10.1016/j.intfin.2021.101286

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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