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player ready...The Federal Reserve Tuesday sought to stimulate bank lending by reducing the level of reserves that financial institutions must hold against deposits. Bankers and economists said the move was a welcome sign of continued concern about the lagging economy but won`t have the impact of a further cut in the Fed`s discount rate.
The economic benefit will be ”a lot less” than even a quarter percentage point cut in short-term interest rates, said Samuel Kahan, chief economist for Fuji Securities Inc. of Chicago.
”Right now, it`s our guess that it won`t materially affect lending,”
said a spokeswoman for Harris Trust & Savings Bank.
The reduction in reserves, to 10 percent of deposits from 12 percent, nonetheless caught the attention of economy-watchers because it is the first major change in reserve standards since 1980.
It also came a day before Fed Chairman Alan Greenspan is to appear before a congressional panel to defend his monetary policy. Congressmen have criticized the Fed throughout the recession for waiting too long to lower interest rates and then moving too slowly.
The Fed said in a statement it cut the reserve standards to ”strengthen the financial condition of banks and thereby improve their access to capital markets, putting them in a better position to extend credit.”
”It`s really a tax cut for banks. The reserves are essentially a tax on deposits,” said Bert Ely, a banking consultant based in Alexandria, Va.
Bank stocks rallied on news of the reduction, but Wall Street was otherwise unimpressed. Bond prices sank, apparently on disappointment that the central bank hadn`t taken further steps to lower interest rates. Stocks also fell, and the Dow Jones industrial average ended the day down 21.24 at 3224.73.
Reserves depress bank earnings because they are paid no interest on the money, which must be kept in bank vaults or deposited with the Fed. Savings and loan associations and other depository institution also must meet the reserve rules.
For every dollar on deposit in these institutions, 12 cents has until now essentially been earning them nothing. Now that portion will fall to 10 cents. When the decision takes effect April 2, it will free an estimated $8 billion in reserves.
Most banks and S&Ls recently have not been hampered by a lack of funds to lend but have found it difficult to find borrowers that meet their credit standards, Ely said. So most of the reserves initially will be converted into interest-earning government bonds rather than loans, he said.
”What will probably happen in April is the Fed will hold $8 billion less in bank deposits, and the banks will hold about $8 billion more in government securities,” Ely said.