Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, February 19, 1992 TAG: 9202190071
SECTION: BUSINESS PAGE: B4 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
BANKS' MONEY FREED UP FED ACTION EXPECTED TO PUT $8 BILLION INTO NEW LOANS
The Federal Reserve Board, in a new bid to stimulate a sluggish economy, said Tuesday it was reducing the amount of money banks must hold in reserve. The action could make more than $8 billion available for new loans.The Fed said it was making the change, the first time in 12 years it has altered its reserve requirements, so banks can make loans rather than reserving money against bad loans.
The cut in required reserves from 12 percent to 10 percent will be effective on April 2.
It means banks will hold $10 rather than $12 of every $100 in customer deposits in non-interest bearing accounts at the Fed or in a vault, banks and thrifts as reserves.
The central bank estimated that if the reduced requirement had been in effect last year, it would have made an additional $8 billion available for loans by cutting required reserves from $50 billion to $42 billion.
Lowering the reserve requirement "mainlines liquidity into the system," said Warner Dalhouse, chairman of Roanoke-based Dominion Bankshares Corp. "It is a very wise and appropriate move at this point" and preferable to a cut in interest rates.
He said Dominion would be able to lend $800 to $1 billion "if we had the demand."
Alan Gayle, economist with Crestar Bank in Richmond, said the action will "free up money for us and reduce the cost of deposits to banks" by lowering one of their "hidden costs."
It will make borrowing easier, Gayle said, provided potential borrowers exist. Potential borrowers, he explained, must have a reason to take out a loan and an interest rate low enough to be "financially compelling."
Rates are low enough, he said, but "opportunities [for lending] are slow to surface so far." He called most borrowing up to now "defensive," such as refinancing home mortgages, although there has been a recent upward trend in home buying.
The Federal Reserve, Gayle said, "pulled out all the ammo." He said the action should help along with other monetary policies to assist the pace of economic recovery.
Glenn Bowman, economist with Dominion Bank in Roanoke, said the Fed has sent "a psychological signal . . . a more dramatic indication by the Fed to show accommodation to the banking system."
Lowering reserves constitutes more direct assistance than another cut in interest rates, Bowman said, because it will strengthen bank profitability and capital. With stronger balance sheets, banks will be more able to lend.
The savings will be passed along to consumers in the form of lower costs, Bowman said.
Douglas Waters, regional executive officer in Roanoke for NationsBank, called it "smart election-year politics to really pull out all the stops."
But he said the action will be "stimulative. . . . This is the kind of thing that will reinforce the good economic news." The result, he said, may be a resurgence of the economy during the second quarter.
It's "a plus for banking business and consumers," said Monty Plymale, executive vice president of the Southwestern Region of Central Fidelity Bank. He said lowering reserves will increase bank liquidity and stimulate the economy.
Analysts generally applauded the action, saying that making more money available for loans should lower interest rates.
Some economists speculated that the Fed's action would shave at least a quarter-point more off the federal funds rate, now 4 percent. That is the rate banks charge each other for overnight loans.
Analysts said that providing more money on which financial institutions can earn interest should bolster the institutions' profits, which also would be good for the economy.
Federal Reserve Chairman Alan Greenspan is scheduled to testify before Congress today about the Fed's conduct of monetary policy during the recession. He is expected to face accusations that the central bank has been too slow and timid in cutting interest rates and has made the recession longer and more severe than it would have been otherwise.
In its announcement, the Fed called its lowering of reserve requirements the "first major change" in the reserve ratio on transaction accounts since the Monetary Control Act was adopted by Congress in 1980.
That law made all depository institutions, not just commercial banks, subject to the reserve requirements.
In an action announced in December 1990, the Fed made a more modest change by eliminating the reserve requirement on non-personal time deposits and on investments held in the European currency markets.
writer Mag Poff contributed to this story.