What effect would a reduction in the required reserve rate (rrr) have on banks?
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As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. Show
The following content explains the Board’s authority to impose reserve requirements and how reserve requirements were administered prior to the change in reserve requirement ratios to zero. Additional detail on this reserve requirement regime can be found in the archived Reserve Maintenance Manual: HTML | PDF. The Federal Reserve Act authorizes the Board to establish reserve requirements within specified ranges for purposes of implementing monetary policy on certain types of deposits and other liabilities of depository institutions. The dollar amount of a depository institution's reserve requirement is determined by applying the reserve requirement ratios specified in the Board's Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204) to an institution's reservable liabilities (see table of reserve requirements). The Federal Reserve Act authorizes the Board to impose reserve requirements on transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities. Prior to the change effective March 26, 2020, reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the depository institution. A certain amount of net transaction accounts, known as the "reserve requirement exemption amount," was subject to a reserve requirement ratio of zero percent. Net transaction account balances above the reserve requirement exemption amount and up to a specified amount, known as the "low reserve tranche," were subject to a reserve requirement ratio of 3 percent. Net transaction account balances above the low reserve tranche were subject to a reserve requirement ratio of 10 percent. The reserve requirement exemption amount and the low reserve tranche are indexed each year pursuant to formulas specified in the Federal Reserve Act (see table of low reserve tranche amounts and exemption amounts since 1982). For more history on the changes in reserve requirement ratios and the indexation of the exemption and low reserve tranche, see the annual review table. Additional details on reserve requirements can be found in this Federal Reserve Bulletin article (119 KB PDF), the appendix of which has tables of historical reserve ratios. Notes: The Board's Regulation D (Reserve Requirements of Depository Institutions) provides that reserve requirements must be satisfied by holding vault cash and, if vault cash is insufficient, by maintaining a balance in an account at a Federal Reserve Bank. An institution may hold that balance directly with a Reserve Bank or with another institution in a pass-through relationship. Reserve requirements are imposed on "depository institutions," defined as commercial banks, savings banks, savings and loan associations, credit unions, U.S. branches and agencies of foreign banks, Edge corporations, and agreement corporations. China’s central bank has announced a 0.25 percentage point cut to the reserve ratio for commercial banks. Photo: Bloomberg China cuts reserve requirement ratio to boost economy, releasing US$83.2 billion into banking systemPeople’s Bank of China decision comes only two days after Premier Li Keqiang said there will be a ‘timely’ reduction in the reserve requirement ratio (RRR)He also said other policy tools could be used to support the economy which is faltering amid the country’s worst coronavirus outbreaks in two yearsPublished: 6:31pm, 15 Apr, 2022 Updated: 11:06am, 24 Nov, 2022 China’s central bank has announced a 0.25 percentage point cut to the reserve ratio for commercial banks. Photo: Bloomberg BEIJING (Reuters) - China’s central bank on Monday reduced the amount of cash that banks must hold as reserves for the fifth time since February 2015, as it seeks to revive a slowing economy. The People’s Bank of China (PBOC) said on its website that it would cut the reserve requirement ratio by 50 basis points for all banks, taking the ratio to 17 percent for the country’s biggest lenders. The cut is effective March 1. LOUIS KUIJS,
HEAD OF ASIA ECONOMICS, OXFORD ECONOMICS, HONG KONG “The aim clearly is to support the economy at a time that downward pressures on growth remain strong and uncertainty is elevated. It remains to be seen what the response on the FX market is. But, in line with the G20 discussions this weekend, this move suggests that for China’s policymakers growth remains key. “The PBOC needs to walk a fine line. Ambitious growth targets amid weak economic growth mean that monetary policy is called
upon to help support growth. But the authorities also seem to want to support the RMB in the face of capital outflows and depreciation pressure. That means that the room for interest cuts has decreased. In recent weeks some of the signals given by policymakers suggested that they preferred low profile measures over high profile ones. However, today’s move shows that, while they have so far shied away from cutting benchmark interest rates, they are willing to use a RRR cut, a relatively
high-profile instrument, although clearly not as high-profile as a benchmark interest rate cut.” YANG ZHAO, CHINA CHIEF ECONOMIST, NOMURA“This is basically in line with our expectations. We believed the PBOC needed to cut RRR in March to offset headwinds in the economy. We can see that from PMI and other earlier indicators showing growth, momentum weakened when we entered this year. Also, recently, the equity markets have dropped off. So I think at this stage, the PBOC is trying to support growth, and trying to support the equity market a little bit. “Also if we look more closely at the credit data, we can see capital outflows are pretty strong so there’s definitely a need to cut RRR to offset capital outflows and ensure liquidity is ample in the domestic market... “In our view, we think the PBOC will cut RRR four times this year as well as two benchmark rate cuts this year. “This (RRR cut) has very little to do with supply side reform. This is purely monetary policy. They are targeting aggregate demand and trying to lower financial costs because of high debt in the corporate sector. This is quite different to supply side reform. That’s more structural. I don’t think the PBOC can do much on that front.” IRIS PANG, SENIOR ECONOMIST, G.CHINA, NATIXIS ASIA RESEARCH, HONG KONG: “We believe that the purpose is to increase the commercial banks’ lending ability. Total RMB deposits amounted to RMB 137.76 trillion at the end of January and a 50 bps cut releases RMB 689 billion. “The move is unexpected after the announcement that the PBOC would conduct daily open market operations. This reflects the central bank is keen to ease liquidity in the China banking sector. The central bank may then need more window guidance to commercial banks to ensure these additional liquidity would not be directed to save zombie corporates in overcapacity industries. “The unexpected cut in RRR will certainly increase the depreciation pressure of both CNY and CNH. USD/CNH depreciated to 6.5523 from the CNY fixing rate of 6.5452. High volatilities are expected in both the foreign exchange market and equity market. “We expect lower interest rates in China would be mostly reflected in open market operations.” HAO ZHOU, ECONOMIST, COMMERZBANK, SINGAPORE:“The 50 bps RRR cut is a bit surprising as the authorities reiterated that RRR cut will add pressure on CNY exchange rate. However, the RRR cut is inevitable due to capital outflows. More importantly, the MLF and reverse repos don’t have the same impact as an RRR cut, as the rates for MLF and reverse repos are at least 60-100 bps higher than the interest rates on official deposit reserves. That said, with the help of RRR cuts, commercial banks will be able to lower the cost of funds more effectively. “The recent sell-off in stock market is definitely another reason behind today’s policy move. It appears that China is deeply concerned about the financial instability. By cutting RRR to ensure onshore market liquidity aims to restore the market confidence. “Looking ahead, given the widening fiscal deficit, continued capital outflows and slowing growth, another 100-150bps cut to RRR can be expected this year. Of course, the side effect is on CNY exchange rate. We still see weakening bias in CNY in the foreseeable future; Asian currencies would be under pressure to depreciate as well. “To be blunt, the timing of this cut is not perfect - USD has regained strength in the past two weeks. If PBOC can act ahead of the curve, i.e. when market was pricing a weak USD in early February, China would have more policy room.”WANG JUN, SENIOR ECONOMIST, CHINA CENTRE FOR INTERNATIONAL ECONOMIC EXCHANGES (CCIEE), BEIJING: “I think this is required by liquidity management. The central bank may still rely on RRR cuts to replenish its base money due to foreign exchange sales. The central bank had previously relied on short-term policy tools to provide liquidity. The (yuan) exchange rate has been basically stable recently, while the economy still faces relatively big downward pressure. So, the central bank needs to send out loosening policy signals. “To support ‘supply-side reforms’, the government needs to maintain counter-cyclical policies. The possibility of cutting interest rates exists to help lower borrowing costs.” LI HUIYONG, ECONOMIST, SHENYIN & WANGUO SECURITIES, SHANGHAI: “China’s government is pushing forward the ‘supply side’ reform and the move needs someone to pay the costs. A loosening monetary environment is what we need. “We believe the central government will keep its loosening policy stance this year to support the economy. We expect five further cuts to banks’ reserve requirement ratio (RRR) this year, together with one or two more interest rates.” QU HONGBIN, CHIEF CHINA ECONOMIST, HSBC:“It’s not a total surprise. Growth is still slowing and inflation has a deflationary risk so this points to further easing. “The G20 also made it clear we need to use all policy available to try to support growth so putting all this together, I think it becomes a consensus that more needs to be done to support growth. “Supply side reform is still the key focus but you still need to have stable growth in order to provide favorable conditions for supply side reform. “Stabilized growth is a condition for implementing supply side reform. It’s best achieved from both expansionary fiscal and monetary policy.” Reporting by China economics team; Editing by Richard Borsuk and Jacqueline Wong for-phone-onlyfor-tablet-portrait-upfor-tablet-landscape-upfor-desktop-upfor-wide-desktop-up What happens when RRR increases?Increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.
Would a reduction of the RRR would free up reserves for banks allowing them to make more loans and increase money supply?A reduction of the RRR would free up reserves for bank, allowing it them to make more loans. It would also increase the money multiplier. Both effects would lead to a substantial increase in the money supply. Slight increase in the RRR would force banks to hold more money in reserves.
What does RRR stand for How does the RRR affect monetary policy?The required rate of return (RRR) is the minimum return an investor will accept for owning a company's stock, as compensation for a given level of risk associated with holding the stock. The RRR is also used in corporate finance to analyze the profitability of potential investment projects.
What is the effect of a decrease in required reserve ratio on interest rate?A lower reserve ratio requirement gives banks more money to lend, at lower interest rates, which makes borrowing more attractive to customers. Conversely, the Fed increases the reserve ratio requirement to reduce the amount of funds banks have to lend.
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