funds invested in agency paper and were apoplectic when those companies failed and the possibility of default was real. What I believe would happen is that there would be a lot of "risk-free" paper with enhanced yield that banks would use as cash substitutes. This paper will be found to not be a good substitute for Treasuries or cash and the panic will cause their price to decline at the worst possible time. The alternative, of course, is to do the same in the non-cash portion of the bank asset portfolio as you have suggested and that is also likely. Availability isn't an issue. The CB just injects them by lending to the banks. The banks not wanting them is not an issue. They're mandated -- it's a cost of doing business. And the CB can rate-adjust both the reserves and the loan to cover those costs at its option and allow competition. Mostly importantly, there's no internal capital allocation for reserves -- which means no ROE is required. Banks just need to recover operating costs, which the CB can accommodate as per above. Also, if all that doesn't cover costs, the banks adjust their margins on loans funded by non-deposit funding. The CB only supplies reserves in the form of deposits held at the CB. Most ideas of fully reserving do not just involve deposits held at the central bank but also involve holding "cash-like" instruments as "equivalent to" reserves. The devil being in the details, lobbyists will want