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lectur4-page26 - Board of Governors within limits...

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All depository institutions—commercial banks, saving banks, savings and loan associations, and credit unions—must retain a percentage of certain types of deposits to be held as reserves. The reserve requirements are set by the Federal Reserve under the Depository Institutions Deregulation and Monetary Control Act of 1980. Since the early 1990s, reserve requirements have been applied only to transaction deposits (basically, interest-bearing and non-interest-bearing checking accounts). The current reserve requirement is 10 percent on net transaction accounts in excess of $44 3 million 3 percent on net transaction transaction accounts in excess of $44.3 million, 3 percent on net transaction accounts of $44.3 million or less (as of 12/30/99, http://woodrow.mpls.frb.fed.us/info/policy/res-req.html). The reserve requirement was reduced from 12 percent to 10 percent April, 1992. Required reserves are a fraction of such deposits; the fraction—the required reserve ratio—is set by the
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Unformatted text preview: Board of Governors within limits prescribed by law. Thus, total required reserves expand or contract with the level of transaction deposits and with the required reserve ratio set by the Board; in practice, however, the required reserve ratio has been adjusted only infrequently. Depository institutions hold required reserves in one of two forms: vault cash (cash on hand at the bank) or, more important for monetary policy, required reserve balances in accounts with the Reserve Bank for their Federal Reserve District. The reserve requirement is probably the most powerful monetary policy tool and is seldom changed because of the major impact it has on the supply of money 26 is seldom changed because of the major impact it has on the supply of money. Above is from: Federal Reserve System: Purposes and Functions , A publication of the Board of Governors of the Federal Reserve System, URL: http://www.federalreserve.gov/pf/pf.htm...
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