Do reserve requirements reduce the risk of bank failure?

Glocker, Christian (2019): Do reserve requirements reduce the risk of bank failure?

Abstract

There is an increasing literature proposing reserve requirements for financial stability. This study assesses their effects on the probability of bank failure and compares them to those of capital requirements. To this purpose a banking model is considered that is subject to legal reserve requirements. In general, higher reserve requirements promote risk-taking as either borrowers or banks have an incentive to choose riskier assets, so banks' probability of failure rises. Borrowers' moral hazard problem augments the adverse effects. They are mitigated when allowing for imperfectly correlated loan-default as higher interest revenues from non-defaulting loans curb losses from defaulting loans.

• Item Type: MPRA Paper
• Language: English
• Keywords: Reserve requirements, liquidity regulation, capital requirements, bank failure, default correlation
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

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