19. Reserve requirements are considered by bank management to act as a \"tax\" o

Question

19. Reserve requirements are considered by bank management to act as a "tax" on deposits since the bank must holds as reserves (and therefore not deploy that amount into making loans or buying securities) a stated percentage of deposits. In an effort to remain in legal compliance but to avoid the impact of this "tax", which financial innovations were developed by bankers? CIRCLE ALL THAT APPLY. (2 points) a. Savings accounts b. ATMs (Automatic Teller Machines) c. Money Market Mutual Funds d Sween accounts

Explanation / Answer

The correct answer is (D) Sweep Accounts

Sweep accounts allowed banks to remian in legal compliance and avoid the "tax" of reserve requirements, legal minimums of cash and Federal Reserve deposits. We know, that banks earn limited interest on reserves, so they often wish that they could hold fewer reserves than regulators require. By using computers to sweep checking accounts at the close of business each day, banks reduced their legally recognized deposits and thus their reserve requirements to the point that reserve regulations today are merely a requirement, no longer a binding.

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