Do reserve requirements restrict bank behavior?

Abstract

This study aims to examine whether a reserve requirement system constrains bank behavior. In Japan, a system is applied to certain regional banks where required reserve ratios are imposed based on the amount of their deposits. Using a natural experiment, we perform a bunching estimation to examine whether this reserve requirement system decreases bank deposits. To the best of our knowledge, this study is the first to examine the effects of reserve requirement systems through bunching estimation. Our results demonstrate that the reserve deposit system depresses bank deposits, resulting in a decline in total deposits. However, this phenomenon is not observed during periods of unconventional monetary policies. This study highlights an important consideration when discussing changes in the reserve requirement system.