Reserve Requirements as Implicit Taxation of Commercial Banks

Igor Eromenko

MPRA Paper from University Library of Munich, Germany

Abstract: Reserve requirements is viewed as very important instrument of the monetary policy, with the help of which Central Bank can influence at money supply and credit creation. At the same time this instrument imposes implicit tax on financial institutions, which are subject to this regulation. Reserve requirements in Ukraine stay at quite high level and the topic of this paper is analysis of such implicit taxation, its impact on economy and possible path of reforms in Ukraine. We argue that faced wit high reserve requirements and, as a consequence, diminishing revenues, commercial banks will try to pass as much costs as they can to their clients, widening interest rate spread. Eventual effect of high reserve requirements would be lower deposit rate, higher loan rate, less intermediation and aggregate investment that finally can lead to drop in output. In this paper we develop formal model of implicit taxation and provide empirical analysis, roughly estimating cost of reserve requirements for Ukrainian banking sector, which comes to almost 1 UAH bn per year. Further, we discuss policy issues and possibility of reducing reserve requirements and come to the conclusion that in Ukraine gradual decrease of required reserves is possible and indeed needed.

Keywords: monetary policy; instruments of central bank; reserve requirements; model of banking sector; Ukraine (search for similar items in EconPapers)
JEL-codes: C60 E52 E58 G28 (search for similar items in EconPapers)
Date: 2002
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Published in “Fostering Sustainable Growth in Ukraine” Stephan von Cramon-Taubadel; Iryna Akimova (Eds.). Hidelberg, Physica-Verlaf (2002): pp. 201-212

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