What would be the effect of imposing a 100 percent reserve requirement to depository institutions? Hugo Rodríguez Mendizábal (Instituto de Análisis Económico CSIC, MOVE, Barcelona GSE) discussed this question in this seminar at the EUI, Florence, on 17 March.

Professor Rodríguez Mendizábal’s paper contends that reserves do not compete with loans on the asset side of bank’s balance sheets and only affect liquidity provision by banks indirectly through their impact on the cost of loan and deposit creation. This cost could be driven to zero if, as the Eurosystem does, central banks remunerated required reserves at the same rate of their refinancing operations. The paper argues that the crucial constraint imposed by a fully backed banking system is collateral availability by depository institutions.

See the slides that were presented during the seminar.