Degree Name

Master of Arts (MA)

Semester of Degree Completion

2002

Thesis Director

Eric Hake

Abstract

This paper discusses a regulatory plan known as asset-based reserve requirements. By examining the history of reserve requirements in the United States and of current regulatory proposals and practices, I argue that a system of asset-based reserve requirements may provide a useful, though not often considered alternative to the current structures of liability based reserve requirements and capital requirements. Required reserves based on assets provide the Federal Reserve with a powerful, versatile, and adaptable policy tool for monetary policy. Additionally, they ensure risk-assessment, reduce the moral hazard problem associated with deposit insurance, and when applied to all fmancial institutions create a level playing field in the desegregated financial sector. Asset-based reserve requirements do all those things without burdening depositors as liability based reserve requirements do, and without the pro-cyclical characteristics inherent in capital requirements. The work of Thomas Palley (2000 & 2001), Frederic Mishkin (1998), Alan Greenspan (1998), Henry Kaufman (1994), Joshua Feinman (1993), and Paul Bennett (1997 & 2001) was relied upon to reach this conclusion.

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