In What Sense Do Compulsory Ratios Reduce the Volume of Deposits?

Abstract

Except for possible positive ‘psychological effects’ stemming from increased confidence by depositors in the solvency of controlled institutions, the general view in the literature is that compulsory cash/securities/or other ratios reduce the equilibrium volume of deposits. Often this outcome is conceived in terms of settings where compulsory ratios are assumed to be combined with control (rationing) by the authorities of the supply of assets that the intermediaries are compelled to hold in fixed proportion to their deposits, in order to impose a limit on deposits below the level that could otherwise materialise.¹ But even those writers on this subject who assume no such ‘compulsory asset availability constraint’ reach the same verdict, since they see compulsory ratios as reducing the return per unit of deposits accruing to controlled intermediaries, and hence the rate that these intermediaries are willing to pay on deposits.² In the latter vein, furthermore, it has become increasingly fashionable to think of compulsory ratios as a tax;³ and, whether in the context of highly-developed, or in the context of less-developed, economic systems, also to proclaim the undesirability of such devices.⁴