Reserve requirement
In many countries (except Brazil, China, India, Russia), reserve requirements are generally not altered frequently in implementing a country's monetary policy because of the short-term disruptive effect on financial markets.
In exceptional situations, the central bank may provide funds to cover the short-term shortfall as lender of last resort.
[citation needed] With higher reserve requirements, there would be less funds available to banks for lending.
Jaromir Benes and Michael Kumhof of the IMF Research Department report that the "deposit multiplier" of the undergraduate economics textbook, where monetary aggregates are created at the initiative of the central bank, through an initial injection of high-powered money[clarification needed] into the banking system that gets multiplied through bank lending, turns the actual operation of the monetary transmission mechanism on its head.
[8] Under this view, reserves therefore impose no constraints, as the deposit multiplier is simply, in the words of Kydland and Prescott (1990), a myth.
Under this theory, private banks almost fully control the money creation process.
The Reserve Bank of India uses changes in the CRR as a liquidity management tool, hiked it alongside SLR to navigate 2008 financial crisis.
RBI introduced and withdrew Incremental - Cash reserve ratio I-CRR over and above CRR for managing liquidity.
Canada, the UK, New Zealand, Australia, Sweden and Hong Kong[9] have no reserve requirements.
The average cash reserve ratio across the entire United Kingdom banking system, though, was higher during that period, at about 0.15% as of 1999[update].
Both shortfalls and excesses of reserves relative to the commercial bank's own target over an averaging period of one day[10] would result in a charge, incentivising the commercial bank to stay near its target, a system known as reserves averaging.
[12] In the Thomas Amendment to the Agricultural Adjustment Act of 1933, the Fed was granted the authority to set reserve requirements jointly with the president as one of several provisions that sought to mitigate or prevent deflation.
[16] Before that, the Board of Governors of the Federal Reserve System used to set reserve requirements[17] (“liquidity ratio”) based on categories of deposit liabilities ("Net Transaction Accounts" or "NTAs") of depository institutions, such as commercial banks including U.S. branches of a foreign bank, savings and loan association, savings bank, and credit union.
