Do Banks Hold More Vault Cash Than They Need?
By Donald S. Allen Depository institutions are allowed to use vault cash, in addition to funds held on deposit with the Federal Reserve, to satisfy statutory reserve requirements. In 1992, statutory reserve requirements were reduced. Then, in 1995, banks expanded sweeps, or reclassifications, of customers’ cash reserves into savings accounts not subject to reserve requirements. Because of these reductions in required reserves, the percentage of reserves covered by vault cash has increased steadily. In the Eighth Federal Reserve District, this percentage increased from 54 percent in 1993 to 75 percent in 1996. The number of small banks whose required reserves are completely satisfied by vault cash increased from 73 percent in 1993 to 80 percent in 1996; for medium banks the number rose from 26 percent in 1993 to 49 percent in 1996; and for large banks, from none in 1993 to 28 percent in 1996. The chart shows the downward trend in total required reserves for the Eighth District and the u
