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This paper implements a DSGE model with financial frictions based on the balance sheet of the financial intermediaries. The friction is based on an endogenous constraint on the ability of banks to leverage their position. The underlying model used was the one proposed by Gertler and Karadi (2011). On top of this framework we implemented two expansions: the introduction of reserve requirements that must be held at the Monetary Authority, and the creation of a “depositor’s confidence in the financial system” shock. We analyze the impact that the reserve requirements have on the economy and on the transmission channels of monetary policy. Our conclusion is that the presence of reserve requirements amplifies the transmission of monetary policy by the credit channel, increasing the leverage of banks when interest rates fall, and decreasing otherwise. We show that this decline in credit when interest rate is increased can be counterbalanced by a macroprudential policy rule that adjusts the level of reserve requirements based on deviations of credit from it’s steady state value. Finally, we also show that reserve requirements have an important economic cost, since it retains capital from the economy, maintaining it in a lower steady state level of investment, output, employment and consumption.

DSGE models; financial frictions; monetary policy; reserve requirements; macroprudential policy