important a binding constraint on banks’ holdings of assets
that qualify as reserves. After reviewing definitions and
concepts, we look at the trends indicating that banks have been
successful in operating with significantly lower amounts of
non-interest-bearing reserve assets. We also show that the
periodic effects in the federal funds market associated with
reserve requirements appear to be greatly reduced. Moreover,
partly because of the growth of automated teller machines
(ATMs), more banks have been able to fulfill their
requirements entirely with vault cash. We present an
econometric analysis showing that vault cash holdings have
become linked more significantly to market interest rates, a
finding consistent with the theoretical prediction that banks
would tighten cash inventory management techniques in the
absence of binding reserve requirements.
II. Bank Reserves: A Review
Most banks’ marginal reserve requirements are 10 percent of
demand and checking deposits.3 Banks can fulfill these
requirements with vault cash and with balances in their Federal
Reserve accounts.4 Neither of these asset categories, however,
earns interest for the bank. A bank typically will use both of
these assets to produce payments services, but otherwise the
two types of assets are rather different and not close substitutes.
Vault Cash
Vault cash includes currency 英语论文网 【http://www.51lunwen.org】held within the United States by
depository institutions. Banks use this currency for a wide
variety of purposes, such as:
• money kept in ATMs;
• large cash deposits still being verified;
• large withdrawal orders being prepared for delivery;
• supplies of cash or coin stored by banks (or by their
agents, such as armored carriers), for example, to meet
customer requests;
• cash in transit between branch offices.
In short, vault cash is an important input to banking
because a key function of banks is to provide cash services to
customers. The bank’s total vault cash is the sum of cash being
processed or used in a variety of places and for a variety of
purposes. Therefore, optimal inventory size is a rather complex
notion. Factors such as the geographic dispersion of bank
offices, the cost of protection, and the mix of cash-related
services demanded by the bank’s customers are important
determinants of how much vault cash a bank would need for
business purposes, even in the absence of reserve requirements.
In addition to a bank’s business uses for cash, the direct and
opportunity costs of holding cash are also key determinants of
optimal inventory size. One set of cost elements includes
security and storage. A more important factor is the forgone
return that a bank could have earned investing these funds in
other ways, for example, at market interest rates. In principal,
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