: Reserve requirements

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Why European Central Banks wants to eliminate the reserves requirements (why is this important for the stimulation of the economy?)

In: Economics

Banks are generally required to keep a portion of all customer deposits in cash (or equivalents) and can’t lend out this portion.

This can be used as a control of money supply: if banks are warned that that reserve requirement is about to increase, they will be less willing to make additional loans. Harder access to credit will slow down economic activity such as starting new businesses, home buying, etc.

Alternatively, lowing that requirement frees up deposits to be used for lending purposes, allowing banks to make additional loans with the same amount of customer deposits. With banks more willing/able to make loans, more people can make loans to purchase goods or start businesses

The US has already temporarily zeroed out their reserve requirement near the start of the pandemic situation.