Bank reserves

Bank reserves are a commercial bank's cash holdings physically held by the bank,^[1] and deposits held in the bank's account with the central bank. Under the fractional-reserve banking system used in most countries, central banks may set minimum reserve requirements that mandate commercial banks under their purview to hold cash or deposits at the central bank equivalent to at least a prescribed percentage of their liabilities, such as customer deposits. Such sums are usually termed required reserves, and any funds above the required amount are called excess reserves. These reserves are prescribed to ensure that, in the normal events, there is sufficient liquidity in the banking system to provide funds to bank customers wishing to withdraw cash. Even when there are no reserve requirements, banks often as a matter of prudent management hold reserves in case of unexpected events, such as unusually large net withdrawals by customers (such as before Christmas) or bank runs. Traditionally, central banks do not pay interest on reserve balances, but such schemes have become increasingly common in the 21st century.^[2] Funds in banks that are not retained as a reserve are available to be lent, at interest.

In bookkeeping, reserves are ordinarily part of the equity of a company. Bank reserves, on the other hand, are part of the bank's assets. In a bank's annual report, bank reserves are referred to as "cash and balances at central banks".

Reserves on deposit (of a commercial bank): the deposit accounts for the commercial bank at the central bank.

[3]

Vault (of a commercial bank): paper currency and current coins owned by the commercial bank and (generally) held in the bank vaults of the commercial bank.^[4]

cash

Borrowed reserves: bank reserves that were obtained by borrowing from the central bank.

Non-borrowed reserves: bank reserves that were not obtained by borrowing from the central bank.

Required reserves: the amount of reserves (reserves on deposit plus vault cash) that commercial banks are required to hold, as determined by the central bank as a function of the commercial bank's deposit liabilities.

[5]

: bank reserves in excess of the reserve requirement. A portion of excess reserves (or even all of them) may be desired reserves.

Excess reserves

Free reserves: the amount by which excess reserves exceed borrowed reserves.

[6]

Total reserves: all bank reserves, i.e. cash in the vault, plus reserves on deposit at the central bank, also borrowed plus non-borrowed, also required plus excess.

Bank deposits at central bank[edit]

Commercial banks are usually required to keep funds in the bank's account with the central bank. Such funds are usually counted as part of the banks' reserves. Some central banks pay interest on these deposits while others do not.

Capital requirement

Gold reserve

Monetary base

References[edit]

Vogel, Harold L. (2001). Entertainment Industry Economics: A Guide for Financial Analysis. New York: Cambridge University Press. ISBN 0-521-79264-9

available on FRASER