APPLICATION OF RESERVE REQUIREMENTS: FOREIGN PRACTICE AND UKRAINIAN REALITIES

Authors

DOI:

https://doi.org/10.15407/economyukr.2025.01.074

Keywords:

banks; monetary policy; required reserves; liquidity; loans; deposits.

Abstract

Adaptive reserve requirements policy, which involves differentiation and dynamic change of reserve ratios, serves as central bank’s measure to ensure financial stability. The essence of reserve requirements, methods of their accounting and differentiation criteria are disclosed. The objectives of reserve requirements are summarized: a) prudential supervision, b) liquidity management, c) regulation of capital flows movements. The positives (cheap way to sterilize excess liquidity, impact on the structure of bank liabilities) and risks (reduction of bank liquidity, indirect impact on interest rates, stimulation of banks’ risky behavior, imprecision of influence) of the use of the requirements are identified.

It is noted that the impact of mandatory reserve requirements on lending is that, due to the countercyclical application of reserve requirements, the amplitude of credit cycles decreases, and the impact on currency stability consists in the substitution of foreign currency in bank balance sheets. A historical review of changes in reserve requirements in Ukraine has shown: a) liberalization of requirements during crisis periods, b) a change in the structure of requirements since 2008 in order to reduce currency liabilities; c) stimulation of raising long-term funds in 2011–2014 and since 2023; d) a cycle of high requirements since 2023. The ineffectiveness of the mandatory reserve requirements policy in Ukraine is explained by the high share of demand deposits and the fact that, despite banks having the liquidity available (given the growth of economy monetization), they keep it in reserve (given the growth of the volume of bank required reserves) or invest in less risky instruments (given the growth of the volume of investment by banks in NBU certificates of deposit and domestic government bonds) rather than direct it into lending (given the low credit depth). Recommendations have been developed to improve the reserve requirements policy in Ukraine.

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Published

22.01.2025

How to Cite

SHAPOVAL, Y. (2025). APPLICATION OF RESERVE REQUIREMENTS: FOREIGN PRACTICE AND UKRAINIAN REALITIES. Economy of Ukraine, 68(1 (758), 74–95. https://doi.org/10.15407/economyukr.2025.01.074

Issue

Section

Finance. Taxes. Investment