Question

If the Federal Reserve were to do away with the required reserve regulation, do you think banks would stop holding reserves? explain

Answer 1

if the federal reserve is providing interest on holding reserves and that interest rate is greater than the interest rate on loans, then perhaps it might be profitable for commercial banks to hold reserves. Generally, required reserves do not bear any interest while if these reserves are used as loans they will be able to generate interest for the bank. In such a scenario if the reserves are not made mandatory, commercial banks will have no incentive to keep reserves because they will instead use these reserves in generating loans and earn interest on them.