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March 1976

Recent Changes in Reserve Requirements: An Example of Contradictory Regulation


One responsibility of the Federal Reserve System is to promote sound banking practices. In recent years this Federal bank regulator has been concerned that some banks were tending to leave themselves vulnerable to liquidity crises by concentrating a large share of their time deposits in short maturities, particularly large certificates of deposit. One tool that the Board has used to counter this tendency has been higher reserve requirements on short-term lime deposits than on longer maturity deposits. The latest such Board action came in October 1975 and January 1976 when reserve requirements were reduced on member bank time deposits with maturities of 180 days or more.