Reserve Requirements
The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with the central bank. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds. This acts as a change in the money supply. Central banks typically do not change the reserve requirements often because it creates very volatile changes in the money supply due to the lending multiplier.
Read more about this topic: Monetary Policy, Monetary Policy Tools
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“We must reserve a back shop all our own, entirely free, in which to establish our real liberty and our principal retreat and solitude.”
—Michel de Montaigne (1533–1592)