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Chicago Fed Letter, No. 253, August 2008
Sweep Activity: Managing Bank Reserves in the Seventh District
The U.S. Federal Reserve System imposes reserve requirements on banks and other depository institutions. Reserve requirements perform a critical support function in the financial system. They help ensure a stable, predictable demand for reserves, which in turn enables the Federal Reserve to achieve policy objectives by controlling the supply of reserves. However, this comes at a cost. If banks do not have enough cash in their vaults to satisfy reserve requirements, calculated as a percentage of specified deposit liabilities, they must hold additional non-interest-bearing reserves on deposit at the Federal Reserve. As such, reserve requirements represent an implicit tax on deposits, since funds held to satisfy these requirements cannot be allocated to interest-bearing assets.
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