The Carry-Forward Provision and Management of Bank Reserves

Authors

  • RICHARD M. FRIEDMAN,

  • WILLIAM W. ROBERTS

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    • The authors are Associate Professor and Professor of Economics at California State University, Northridge and would like to acknowledge helpful comments from Edward J. Kane and Gary Santoni and financial support for this project from the CSUN Bureau of Business Services and Research.

ABSTRACT

The 1968 amendment to Regulation D of the Federal Reserve Code permits banks to carry forward one sequential reserve excess or deficiency into the next reserve accounting period. This was intended to reduce the weekly pressure on individual banks to adjust their reserve position. We find, instead, that the carry-forward provision gives individual banks an incentive to alternate weekly between reserve excesses and reserve deficiencies. Thus, the carry-forward provision tends to induce reserve position adjustments even in the absence of changes in the level of deposits. In addition, the carry-forward provision reduces the impact of interest-rate changes on the desired level of excess reserves.

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