As a result fis often view required reserves as

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Unformatted text preview: f their customers directly. For well-managed FIs, however, this optimal level is normally low, especially if the central bank (or other regulatory body) does not pay interest on required reserves. As a result, FIs often view required reserves as similar to a tax and as a positive cost of undertaking intermediation.16 Credit Allocation Regulation Credit allocation regulation supports the FI’s lending to socially important sectors such as housing and farming. These regulations may require an FI to hold a minimum amount of assets in one particular sector of the economy or, alternatively, to set maximum interest rates, prices, or fees to subsidize certain sectors. Examples of asset restrictions include the qualified thrift lender test (QTL), which requires thrifts to hold 65 percent of their assets in residential mortgage-related assets to retain a thrift charter, and insurance regulations, such as those in New York State that set maximums on the amount of foreign or international assets in which insurance companies can invest. Examples of interest rate restrictions are the usury laws set in many states on t...
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This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.

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