18-8 The establishment of minimum required reserves by regulators is a method of extracting taxes from FIs.

Question

Quizplus · Accepted Answer

Minimum required reserves are funds that financial institutions are required to hold in reserve as a portion of their deposits, which cannot be used for lending or other investment purposes. This requirement is set by regulators as a way to ensure the safety and stability of the financial system by reducing the risk of bank runs and insolvency. However, from the perspective of financial institutions, holding reserves represents a cost of doing business, since they do not earn any interest on these funds. Therefore, in effect, the establishment of minimum required reserves can be seen as a form of tax or burden placed on FIs by regulators.

18-8 the Establishment of Minimum Required Reserves by Regulators Is