Asset-Based Reserve Requirements Revisited: The Case for an Incremental Approach

This article examines asset-based reserve requirements (ABRR) as a supplementary policy tool to enable the Federal Reserve to counter asset bubbles and mitigate systemic fallout from their unwinding. Although discussed in heterodox economic literature surrounding the global financial crisis (GFC), ABRR was not incorporated into the post-crisis reconstruction of thwarting institutions, and scholarly interest waned. We revisit ABRR in light of structural changes in the US financial system and the post-GFC regulatory framework. While reforms emphasize capital adequacy, they provide limited tools for addressing speculative asset bubbles. We propose the gradual implementation of ABRR targeting institutions engaged in key interest rate facilities. This approach accounts for political and institutional constraints while allowing policymakers to evaluate effectiveness and build confidence in ABRR as a macroprudential instrument. JEL Classification : B52, G01, G28, E44