Asymmetric Information and Optimal Bank Reserves

Richard Cothren

Journal of Money, Credit and Banking, 1987, vol. 19, issue 1, 68-77

Abstract: One traditional argument in favor of bank reserve requirements holds that since a b ank and its depositors are asymmetrically informed as to the bank's reserve position and its portfolio, the bank will hold too few reserves and too risky a port folio. This being the case, presumably a central banking authority is equipped t o impose and to monitor a minimal reserve requirement yielding a Pareto superior outcome. This paper analyzes this position in the context of a formalmodel and shows that at least for some parameters of the model there is such a case for a minimal reserve requirement. Copyright 1987 by Ohio State University Press.

Date: 1987
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