This statement is common in economic literature on the use of reserve requirements. Here, we provide an explanation of the mechanism implicitly referred to in this statement.
Suppose that a central bank increases the reserve requirement ratio for its banks. In absolute terms, banks will therefore be required to hold more money in their accounts at the central bank than they did before. The money « locked up » in this way then represents an opportunity cost for each bank: instead of locking up this money, they could have used it to purchase income-generating assets, for example, or engaged in profitable lending operations with less concern about not having the funds necessary to meet reserve requirement requirements.
In this respect, an increase in the reserve requirement ratio, if the reserves are not remunerated at a « reasonable » rate, represents a tax on the banking sector. This is one of the reasons why « reserve requirements » are often cited as a common instrument of financial repression (see, for example, this educational article by the IMF on financial repression at the link here).
Julien P.
[1] This argument, in favor of credit, is relevant in a normal monetary context. It is no longer relevant, of course, in the context of current unconventional monetary policies, where, in the countries concerned, reserve constraints are not a problem for banks in terms of credit growth.
For further reading: see the very interesting article by Joshua N. Feinman, « Reserves Requirements, history, current practices and potential reforms, » available directly from the Fed’s website by clicking on this link.
