Minimum reserve system

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The minimum reserve system , partial reserve system or fractional reserve system is a currency system in which a bank only has to keep part of the bank balance always available as a reserve for disbursement. The minimum reserve rate determines the amount of the mandatory reserve. This makes it possible in the minimum reserve system to expand the amount of money in the underlying currency system far beyond the level of the actually deposited, available reserve.

history

The Bank of England , which was created through a debt swap, only held a partial reserve and also lent money. The bank developed its role as lender of last resort through the South Sea Bubble . A partial reserve system was created across Europe .

In the opinion of Richard A. Werner , the minimum reserve should have lost its importance as an instrument for monetary policy control. Some states have even started to abolish the minimum reserve. The minimum reserve would still be used by other central banks, but mostly not for monetary policy purposes. This would limit the ability of central banks to act effectively against inflation and deflation .

With the financial crisis from 2007 onwards , criticism of the current minimum reserve system was voiced in Germany. It was a full money system with full money proposed for various reasons.

System structure

A minimum reserve system describes a banking system within a currency system in which the issuing of credits exceeds the amount of base money and currency reserves . The structure of the system varies compared to the respective currency constitution .

In order to minimize the risk of a bank run and collapse of this system due to excessive cash withdrawal, banks are often supervised and regulated by the governments of the underlying state or other subjects of international law . Among other things, deposit insurance is guaranteed and the role of lender of last resort is assumed.

The theories about a minimum reserve system are determined by various monetary theory doctrines that deal with how to maintain the confidence of market participants and the general public in this system.

The minimum reserve system is currently the worldwide standard. Systems are widespread in which the underlying state or subject of international law assigns monetary authority to one or more authorities via the constitution . In most cases, a currency monopoly and thus a legal tender was also established. The issue of money is subordinated to a de facto central bank, which thus receives a monopoly on the monetary base of the underlying currency . As a rule, however, the currency constitution also provides that the Monetary Authority also allows other licensed credit institutions , usually private commercial banks , to grant loans . In this case, it is possible that these banks also deposit money by lending draw .

This credit creation is regulated. After lending has taken place, commercial banks must deposit a portion of the newly created bank money in the amount of the minimum reserve with the organization with the monetary authority of the emission rights. For this they need central bank money , which they receive ex-post by depositing appropriate collateral with the central bank.

The minimum reserve functions as a monetary policy instrument of the monetary authority, usually the central bank, to control the demand of the commercial banks for the monetary base . It enables the Monetary Authority to make the commercial banks dependent on their own loans with the Monetary Authority for their credit distribution by increasing or decreasing the minimum reserve rate. However, a restriction on lending through the minimum reserve only becomes binding if the minimum reserve ratios are very high (see section Effect of minimum reserves ).

As a rule, functions of monetary authority are taken over and carried out by the central bank, but not all functions such as bank regulation or banking supervision are automatically the responsibility of a central bank. The most important functions of the minimum reserve system in the euro zone are to stabilize money market rates and to increase the structural liquidity shortage in the banking system.

Levels

Effect of minimum reserves

The minimum reserve has a direct effect on the banks' liquidity situation. An increase in the reserve ratio deprives the banks of liquidity, a decrease leads to liquidity. In developed economies, the minimum reserve primarily helps to stabilize money market rates and strengthens the contact between the central bank and commercial banks.

Limiting lending through the minimum reserve would only have a binding effect if the minimum reserve ratios were very high, as is the case in some emerging and developing countries or in the context of certain capital controls . However, the reserve requirements of central banks in developed economies are typically so low (currently 1% in the euro area) that they have no limiting effect on money creation by commercial banks .

Solvent commercial banks can always obtain the central bank money required to meet the minimum reserve ex-post by depositing the corresponding collateral received when lending against certain discounts and at the current key interest rate either via the main refinancing operations or the central bank's marginal lending facility . It should be noted that a commercial bank must have the minimum reserve above the average of a minimum reserve period, but not at the end of a specific day within this period.

Depending on how high the current reserve interest rate is in relation to the possible income from other forms of investment, the minimum reserve can have a negative effect on the income of the credit institution. On the other hand, there is the income from the loans for which it is necessary.

If a commercial bank with the Monetary Authority, in the case of a central bank, maintains an amount in excess of the reserve requirement, the excess amount is an excess reserve . The excess reserve is usually only very small. More precisely, it corresponds to the commercial banks 'sight deposits at the central bank minus the minimum reserve minus the commercial banks' cash holdings, which are made available for cash withdrawals by non-banks.

Minimum reserve systems in practice

Minimum reserve system in EMU

By 1999 the Deutsche Bundesbank set up to 27 different minimum reserve rates, differentiated according to the type of deposit (e.g. savings, current account, time deposits) and the size of the bank. Since banks from countries in which there is a minimum reserve requirement suffer disadvantages in competition with credit institutions from countries that do not use this instrument, the Bundesbank recently no longer used the minimum reserve requirement as a policy instrument.

Eurosystem minimum reserve system

Legal bases

The legal framework of the Eurosystem's minimum reserve system within the European Economic and Monetary Union is set out in Article 19 of the Statute of the European System of Central Banks (ESCB Statute), the EC Council Regulation on the imposition of minimum reserve requirements by the European Central Bank and in the ECB Regulation on minimum reserves laid down.

The application of the ECB regulation on minimum reserves ensures that uniform conditions apply to the Eurosystem's minimum reserve system throughout the euro area, so that the national central banks have the same starting position.

Monetary policy function

In the Eurosystem's minimum reserve system, the fulfillment of the average is intended to help stabilize money market rates. The aim is to stabilize money market rates by giving the institutions an incentive to cushion the effects of temporary fluctuations in liquidity.

It is also a function of the system to create or increase a structural liquidity shortage. The Eurosystem's minimum reserve system facilitates this, which could help to better enable the Eurosystem to operate more efficiently as a liquidity provider.

However, when applying minimum reserves, the ECB is required to act in accordance with the objectives of the Eurosystem as set out in Article 105 (1) of the Treaty and Article 2 of the Statute of the ESCB.

In December 2011, the ECB lowered the minimum reserve ratio of the ECB from 2.00% to 1.00%.

Effects on credit institutions

It applies to all credit institutions established in the EMU that conduct lending and deposit business with everyone that the ECB determines the amount of the minimum reserve.

The reserve obligation of the individual institutes is determined on the basis of their balance sheet. In order to stabilize interest rates as intended, institutions can also make use of certain provisions, such as average compliance. For this purpose, the banks must fulfill their minimum reserve requirement based on the daily average calendar daily balance within the maintenance period.

According to Article 19.1 of the ESCB Statute, institutions subject to minimum reserve requirements are allowed to use the standing facilities and participate in open market operations via standard tenders . This means that these institutes are approved as business partners.

Upon request, credit institutions can be exempted from the minimum reserve requirement by decision of the ECB. Institutions that are exempt from minimum reserve requirements are not approved as business partners. In addition, institutes are exempt as soon as their approval is withdrawn.

The institutions' minimum reserve balances earn interest at the rate for the main refinancing operations of the Eurosystem.

If a bank in the EMU fails to meet the minimum reserve required by the ECB, there is a risk of a special interest rate of up to 5% above the marginal lending rate or up to double that amount on all borrowed refinancing funds for the entire period of non-compliance. Furthermore, there is a risk of a general exclusion from open market transactions and the facilities as well as the acceptance of a non-interest-bearing deposit up to three times the amount of the deficit.

See also

Individual evidence

  1. ^ A b Andrew C. Sobel : Birth of Hegemony: Crisis, Financial Revolution, and Emerging Global Networks. Chicago: University of Chicago Press, First published: Aug. 22, 2012. ISBN 978-0-226-76760-4 .
  2. ^ Compare Richard A. Werner : New Paradigm in Macroeconomics . Palgrave Macmillan, New York 2005, ISBN 1-4039-2073-7 .
    Charles AE Goodhart : Money, Information and Uncertainty . Macmillan, London 1989, ISBN 0-333-47402-3 .
  3. Sovereign money instead of bank money: The end of the monetary mirage. n-tv Online, June 14, 2010.
  4. The monetary policy of the (ECB 2011) (PDF; 2.0 MB), European Central Bank , Frankfurt 2011.
  5. ^ Deutsche Bundesbank: Minimum reserves. Retrieved June 11, 2018 .
  6. ^ Deutsche Bundesbank: How money is made. April 25, 2017. Retrieved June 11, 2018 .
  7. Claudio Borio and Piti Disyatat: Unconventional monetary policies: an appraisal. In: BIS Working Paper 292.Bank of International Settlements, November 20, 2009, p. 19 , accessed on June 11, 2018 .
  8. Horst Wagenblaß: Economics, public finance and economic policy. 7th edition. Heidelberg 2001, p. 159.
  9. a b c d e f g h i Implementation of monetary policy in the euro area (PDF; 960 kB), European Central Bank (2006)
  10. How the ECB helps the banks. In: Handelsblatt . Online from January 21, 2012.
  11. Regulation (EC) No. 1745/2003 [...] on the imposition of a minimum reserve requirement. European Central Bank (accessed on December 16, 2011; PDF; 188 kB)