Reserve requirements on foreign currency deposits

The paper reviews reserve requirements on foreign currency deposits anddiscusses whether they should be in local currency or in foreign currency.These issues have become important concerns of the Czech National Bank asforeign currency deposits have become a significant proportion of totaldeposits. Foreign currency reserve requirements may provide a safer andsimpler alternative do discourage currency conversion when foreign currencydeposits are a substantial fraction of deposits and reserve ratios aresignificant. The introduction of foreign currency reserve accounts at thecentral bank raises the issue of whether banks should be allowed to usethese accounts for payments purposes. In cases wherea substantial amount ofinterbank transactions is in foreign currency, banks are likely to requestthat the settlement of foreign currency transactions be allowed in the booksof the central bank. There trend in reserve ratios in the Czech Republic similar to general trendin the world to lower reserve requirements. The reserve ration in the Czechbanking sector is 5% for banks and 4% for building societies and for theCzech-Moravian Guarantee and Development Bank. The reserve ratio of reserverequirements on depoits in the CZK does not differ from reserve ratio ofreserve requirements on deposits in foreign currencies. Reserve requirementson deposits in foreign currencies are to be held only in CZK.reserve requirements, foreign exchange, high inflation, currency substitution