Federal Reserve Chairman Jerome Powell spoke to the House Financial Services Committee last week.
Later in the discussions, the Basel III endgame proposal came up. The proposal pertains to bank reserve requirements for both lending and trading activities.
Interest rates get all the attention when it comes to the Federal Reserve’s (the Fed’s) monetary policy. But bank reserve requirements are just as important.
Bank reserves are simply the money that banks keep on hand to back any loans or investments they make. Greater reserves equate to less risk.
Central banks set reserve requirements as a percentage of a bank’s deposits. There are some nuances to this calculation, but since 1982 the base reserve requirement has been 10% for banks here in the United States.
That means US banks have been free to lend or invest $90 for every $100 they receive in customer deposits. They must hold the other 10% in reserves.
We call this a fractional reserve system. Because the bank’s only need to hold a fraction of their customers’ deposits in reserve.
But that changed on March 26, 2020.
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