The Fed slashes proposed reserve requirements, and it’s a big win for banks
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Out of the vault… The Fed’s reversing course on plans to hike banks’ reserve requirements by 20%. Now it plans to raise the amount of cash banks need to have on hand by just 9%. FYI: banks are required to hold a certain amount of cash in vaults to handle a rush of customer withdrawals. Most US banks with less than $250B in assets (aka all except the biggest) won’t be required to hike their reserves if the rule’s adopted.
Regulators say boosting reserves will better prepare the US to handle financial crises like bank runs. On the flip side…
Banks say if they’re forced to hold too much cash in reserves, they’ll have less $$ to lend to Americans and small businesses, which could stifle economic activity (more $$ sitting idle = less $$ moving around the economy).
Take it to the bank… The Fed’s concession is considered a big win for Wall Street, which has been fighting against the hike since it was proposed last summer after the collapse of Silicon Valley Bank, Signature Bank, and First Republic. Bank execs led by JPMorgan Chase CEO Jamie Dimon have rallied against the higher-reserve requirement and earlier this year threatened to sue the Fed. Wall Street lobbyists ran TV and billboard ads, warning consumers that it would hurt their ability to get loans like mortgages.
It’s hard to strike a safe balance… On the one hand, requiring banks to hold too much in reserves could depress lending, which could hamper economic activity and spur a recession. On the other hand, banks need to be prepared to weather a crisis. Whether the Fed’s proposed hike will help the US prevent a financial crisis is up for debate, but experts say the country isn’t prepared to handle another shock.