US Federal Reserve plans to eliminate capital reserve requirements

By Scott McCulloch on Mar 19, 10 02:24 PM in Banking

They say what happens in the United States eventually filters through to the UK.

So the evidence given by the United States Federal Reserve chairman, Ben Bernanke to the Committee on Financial Services, U.S. House of Representatives in Washington, D.C on February 10 makes for interesting reading.

In his written submission to the committee on the Federal Reserve's exit strategy from what he describes as the "extraordinary lending and monetary policies that it implemented to combat the financial crisis and support economic activity" he adds an interesting footnote.

He states: "The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system."

The full text of Mr Bernanke's evidence to the committee can be read here

So while Europe is discussing the idea of forcing our banks to increase minimum reserve requirements in the financial sector, Mr Bernanke appears to be championing an altogether different approach.

European bankers will no doubt claim - if Bernanke's idea is pushed through - the US banks will have an unfair competitive advantage going forward and as such they will have to follow suit in order to remain competitive.

What is incredible is the chairman of the Federal Reserve is suggesting such an idea, given the lack of capital reserves was seen to be a major contributing factor in the collapse of so many banks globally since 2007.

The system which has allowed banks to become such behemoths they are deemed 'too big to fail' is based on the fractional reserve system which forced banks to hold at least a fraction of the money deposited in reserve in order to then loan out the rest.

So for the chairman of the Fed to say publicly he would like to eliminate minimum reserve requirements altogether, that suggests reform currently being discussed at UK government level to reign in the banks may yet prove to be another false dawn in bringing any meaningful banking reform.