Obligatory bank reserves as a macroprudential instrument for ensuring financial stability

Objective: to substantiate the need to use mandatory reserves as a macroprudential tool to ensure financial stability.

Methods: the article uses statistical, theoretical-methodological, comparative methods, and qualitative analysis to explain the functional features of mandatory reserves as a tool for ensuring financial stability.

Results: the author identified the key characteristics of mandatory reserves as a tool of financial stability, reviewed the approaches of central banks of various countries, and described the practice of forming and regulating reserve requirements in Russia. The article analyzes the relationship between mandatory reserves, credit activity of banks and risks (interest rate, liquidity and currency risks). The author shows the influence of mandatory reserves on the frequency and scale of financial stress episodes and clarifies their interrelationships with the central bank’s interest rate and exchange rate
policies.

Scientific novelty: the research reveals the limitations of the Bank of Russia’s policy to ensure financial stability by using mandatory reserves as an anti-crisis tool. Under the growing market uncertainty, the author proposes that the Bank of Russia use mandatory reserves as a macroprudential instrument for regulating financial stability. This will provide an opportunity to curb excessive lending, reduce dependence on external financing, build liquidity reserves, and maintain a stable ruble exchange rate.

Practical significance: the work shows that price stability cannot be the only and sufficient condition for ensuring financial stability. Decisions on regulation of standards or coefficients of mandatory reserves averaging should always be primary relative to decisions on changing the key interest rate. This helps to better smooth out phase differences and the duration of fluctuations in the financial and business cycles during credit overheating or a liquidity crisis by regulating the standards and averaging coefficients of mandatory reserves. In addition, this allows ensuring a stable relationship between the volume of bank lending, production and the borrower’s creditworthiness; to influence credit activity, the volume of lending, the amount of interest rates on loans and deposits, the real exchange rate, and financial leverage on private capital inflows and outflows.

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