Uncompensated Reserve Requirements: The Hidden Tax on Our Banks
Background Paper No. 6
Executive Summary Beginning with the National Bank Act of 1863, the federal government has required a substantial segment of the banking industry to hold idle a specified fraction of their deposits. These idle balances are known as required reserves. Starting in 1914, when Congress established the Federal Reserve System, banks —and after 1980, all depository institutions —have had to keep some measure of their required reserve balances as deposits at the Federal Reserve (the Fed).
Congress has never permitted the Fed to make compensating interest payments on banks ‘ required reserve deposit balances. Consequently, legal reserve requirements have acted as a hidden tax on banks, because these requirements reduce banks’ earnings by the amount of income they must forego.
Was this page helpful to you?
The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work?Contribute to the Tax Foundation
Let us know how we can better serve you!
We work hard to make our analysis as useful as possible. Would you consider telling us more about how we can do better?Give Us Feedback