Part 1 here.
So, Randy replied to my initial comment with the following:
before the crisis it was more like 1% reserves against deposits. In any case what matters is causation, and you've got it backwards. We can certainly calculate an ex post ratio. So what? If the CB always accommodates, there is no constraint resulting from reserves. Which is the case.
I must have inadvertently failed to subscribe to replies, as I didn't receive a notification of his reply. The issue was important enough to me that I decided to check manually. I did that today, Sunday, September 15, 2013, and decided to leave another comment, which was too long for IntenseDebate to allow in a single comment. Consequently, I broke it into two comments as follows:
Thank you, Randy, for your reply.
Electronic Code of Federal Regulations
TITLE 12--Banks and Banking
CHAPTER II--FEDERAL RESERVE SYSTEM
SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS (REGULATION D)
§ 204.4 Computation of required reserves.
(d) For institutions that file a report of deposits weekly, reserve requirements are computed on the basis of the institution's daily average balances of deposits and Eurocurrency liabilities during a 14-day computation period ending every second Monday.
(e) For institutions that file a report of deposits quarterly, reserve requirements are computed on the basis of the institution's daily average balances of deposits and Eurocurrency liabilities during the 7-day computation period that begins on the third Tuesday of March, June, September, and December.
[Reg. D, 74 FR 25637, May 29, 2009, as amended at 74 FR 52875, Oct. 15, 2009; 75 FR 65564, Oct. 26, 2010; 76 FR 68066, Nov. 3, 2011; 77 FR 21852, Apr. 12, 2012; 77 FR 65774, Oct. 31, 2012]
Obviously from that, express regulations allow lending before reserves are required. However, there are deadlines.
Essentially, more of the same:
§ 204.5 Maintenance of required reserves.
(b)(1) For institutions that file a report of deposits weekly, the balances maintained to satisfy reserve balance requirements shall be maintained during a 14-day maintenance period that begins on the third Thursday following the end of a given computation period.
(2) For institutions that file a report of deposits quarterly, the balances maintained to satisfy reserve balance requirements shall be maintained during an interval of either six or seven consecutive 14-day maintenance periods, depending on when the interval begins and ends. The interval will begin on the fourth Thursday following the end of each quarterly reporting period if that Thursday is the first day of a 14-day maintenance period. If the fourth Thursday following the end of a quarterly reporting period is not the first day of a 14-day maintenance period, then the interval will begin on the fifth Thursday following the end of the quarterly reporting period. The interval will end on the fourth Wednesday following the end of the subsequent quarterly reporting period if that Wednesday is the last day of a 14-day maintenance period. If the fourth Wednesday following the end of the subsequent quarterly reporting period is not the last day of a 14-day maintenance period, then the interval will conclude on the fifth Wednesday following the end of the subsequent quarterly reporting period. (cont.)
(c) Cash items forwarded to a Federal Reserve Bank for collection and credit are not included in an institution's balance maintained to satisfy its reserve balance requirement until the expiration of the time specified in the appropriate time schedule established under Regulation J, "Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire" (12 CFR part 210). If a depository institution draws against items before that time, the charge will be made to its account if the balance is sufficient to pay it; any resulting deficiency in balances maintained to satisfy the institution's reserve balance requirement will be subject to the penalties provided by law and to the deficiency charges provided by this part. However, the Federal Reserve Bank may, at its discretion, refuse to permit the withdrawal or other use of credit given in an account for any time for which the Federal Reserve Bank has not received payment in actually and finally collected funds.
[Reg. D, 74 FR 25638, May 29, 2009, as amended at 77 FR 21853, Apr. 12, 2012]
Then there's this:
§ 204.6 Charges for deficiencies.
(a) Federal Reserve Banks are authorized to assess charges for deficiencies at a rate of 1 percentage point per year above the primary credit rate, as provided in § 201.51(a) of this chapter, in effect for borrowings from the Federal Reserve Bank on the first day of the calendar month in which the deficiencies occurred. Charges shall be assessed on the basis of daily average deficiencies during each maintenance period.
(b) Reserve Banks may waive the charges for deficiencies based on an evaluation of the circumstances in each individual case.
[Reg. D, 74 FR 25639, May 29, 2009, as amended at 77 FR 21854, Apr. 12, 2012]
Are you claiming the Fed allowed waivers concerning up to some 90% of reserve requirements in the aggregate? I could ask many questions here but feel it better to simply ask you to clarify and elaborate.
For my part, let me say that I was aware of the compliance dates and that lending could, and does, occur before the lending banks have the reserves necessary to meet the requirements. I was also aware that the Fed can create, and has created, all the reserves it wants at its sole discretion. My point though is that much of the massive reserves created post-Great Recession onset have not been used by the banks against new loans, which would have moved excess reserves to regular reserves, but have rather been left in excess-reserve accounts earning the banks interest from the Fed. My understanding is that the Fed has entertained reducing the interest paid and even charging interest on excess reserves but in its mind, realizes the banks haven't had the borrowers who could meet the lending standards in order to put all those excess reserves to work.
So, where do we differ?