ey and credit partly by manipulating bank funding costs. As financial innovation spawned new sources of bank funding, the Federal Reserve adapted reserve requirements to these new financial products. It changed required reserve ratios on specific bank liabilities that were most frequently used to fund new lending. Reserve requirements were also imposed on other, newly emerging liabilities that were the functional equivalents of deposits, such as Eurodollar borrowings. At times, it supplemented these actions by placing a marginal reserve requirement on large time deposits-that is, an additional requirement applied only to each new increment of these deposits. the 1970s unfolded, it became increasingly apparent that the structure of reserve requirements was becoming outdated. At this time, only banks that were members of the Federal Reserve System were subject to reserve requirements established by the Federal Reserve. The regulatory structure and competitive pressures during a period of high interest rates were putting an increasing burden on member banks. This situation fostered the growth of deposits, especially the newly introduced interest-bearing transaction deposits, at institutions other than member banks and led many banks to leave the Federal Reserve System. Given this situation, policy makers felt that reserve requirements needed to be applied to a broad group of institutions for more effective monetary control-that is, to strengthen the relationship between the amount of reserves supplied by the Federal Reserve and the overall quantity of money in the economy. Monetary Control Act of 1980 (MCA) ended the problem of membership attrition and facilitated monetary control by reforming reserve requirements. Under the act, all depository institutions are subject to reserve requirements set by the Federal Reserve, whether or not they are members of the Federal Reserve System. The Board of Governors may impose reserve requirements solely for the purpose of implementing monetary policy. The required reserve ratio may range from 8 percent to 14 percent on transaction deposits and from 0 percent to 9 percent on non-personal time deposits. The Board may also set reserve requirements on the net liabilities owed by depository institutions in the United States to their foreign affiliates or to other foreign banks. The MCA permits the Board, under certain circumstances, to establish supplemental and emergency reserve requirements, but these powers have never been exercised. the passage of the MCA in 1980, reserve requirements were not adjusted for policy purposes for a decade. In December 1990, the required reserve ratio on non-personal time deposits was pared from 3 percent to 0 percent, and in April 1992 the 12 percent ratio on transaction deposits was trimmed to 10 percent. These actions were partly motivated by evidence suggesting that some lenders had adopted a more cautious approach to extending credit, which was increasing the...
