Bank Stress Tests

Here’s what I don’t understand about the recent bank “stress tests” performed by the Federal Reserve: if the Fed believes that banks need to have more capital, why doesn’t the Fed simply raise the reserve requirement? Wikipedia defines the reserve requirement as “the minimum reserves each bank must hold to customer deposits and notes. …As of 2006 the required reserve ratio in the United States was 10%.” This means that for every $100 a bank receives in deposits, it can lend out $90 of that deposit. The Federal Reserve sets the reserve requirement for banks in the Unites States, so if the Fed feels banks don’t have enough reserves on hand to meet future needs, just raise the reserve requirement.

In reality, I do understand the political reasons why the Fed does not raise the reserve requirement (raising the reserve requirement causes a contraction of the money supply), but somehow the current thinking at the Fed these days seems to want banks to have their cake and eat it to. They want to have the economy have as much money supply growth as possible (through historically low interest rates and keeping the reserve requirement stable) but still wants banks to have more excess reserves. You can’t have it both ways.