Bank Reserves

Global growth is projected to slow significantly in the second half of this year, with weakness continuing in 2024. Inflation pressures persist, and tight monetary policy is expected to weigh substantially on activity. The possibility of more widespread bank turmoil and tighter monetary policy could result in even weaker global growth. Rising borrowing costs in advanced economies could lead to financial dislocations in the more vulnerable emerging market and developing economies (EMDEs). In low-income countries, in particular, fiscal positions are increasingly precarious. Comprehensive policy action is needed at the global and national levels to foster macroeconomic and financial stability. Among many EMDEs, and especially in low-income countries, bolstering fiscal sustainability will require generating higher revenues, making spending more efficient, and improving debt management practices. Continued international cooperation is also necessary to tackle climate change, support populations affected by crises and hunger, and provide debt relief where needed. In the longer term, reversing a projected decline in EMDE potential growth will require reforms to bolster physical and human capital and labor-supply growth.

The massive programmes of government bond buying have led to a fundamental change in the operating procedure of the major central banks. The latter now operate in a regime of abundance of bank reserves. This makes it impossible to raise the money market rate except by increasing the rate of remuneration of bank reserves. This, in turn, leads to a massive transfer of the central banks’ profits to commercial banks that will become unsustainable. We argue that the remuneration of bank reserves is not inevitable and that there is an alternative to the current central banks’ operating procedure that avoids making profit transfers to private agents. We propose to use minimum reserve requirements as a policy tool to achieve this objective. Our favoured proposal is a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks and allow the central banks to maintain their current operating procedures.