Effectiveness of State Reserve Requirements

In recent years many banks have withdrawn from the FRS, and the primary reason given is that they must hold a larger share of their assets in non-earning form as members than if they were nonmembers.1 The FRS has proposed to reduce member bank reserve requirements as a means of making membership more attractive. State bank regulators, however, might wish to counter this action in order to keep the number of banks under their supervision from declining, and might seek to do so by lowering reserve requirements for nonmember banks. For states to offset the effects of a reduction in FRS reserve requirements on the attractiveness of membership, state reserve requirements would have to be effective, in the sense of influencing the cash holdings of nonmember banks or other aspects of nonmember bank behavior. Thus, effectiveness of state reserve requirements is one of the issues to consider in estimating the attractiveness of proposals for reducing member hank reserve requirements.