Hollow Buffers in U.S. Banking: The Hidden Distribution of Deposit Taxation

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Abstract

Has the introduction of interest on reserves eliminated the reserve-requirement tax? Since 2008, U.S. banks have earned interest on reserves and held historically large excess balances. I show that the Bailey-Friedman deposit tax did not disappear; it shifted to the margin. Raising reserve requirements is tax-neutral so long as either reserves earn at least the market rate or banks’ excess balances exceed the increase. Federal Reserve aggregates suggest wide tax-neutral capacity: in late 2024, reserves were about 57% of deposits. Call Report microdata, however, reveal a “hollow buffer”: reinstating a 10% requirement after 2020 would have exposed roughly 45% of deposits to a new tax. The discontinuity at the buffer boundary highlights a policy trade-off: when reserves are ample or remunerated competitively, requirements are labels; once either condition fails, they operate as taxes.

Citation

Pusateri, Nicholas R. 2025. “Hollow Buffers in U.S. Banking: The Hidden Distribution of Deposit Taxation.” Working Paper. URL: https://nicpusateri.com/hollow

@article{pusateri2025clarity,
  title={Hollow Buffers in U.S. Banking: The Hidden Distribution of Deposit Taxation},
  author={Pusateri, Nicholas R.},
  journal={Working Paper},
  year={2025},
  url={https://nicpusateri.com/hollow},
  }