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Bank reserves are a commercial
bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital ma ...
's cash holdings physically held by the bank, and deposits held in the bank's account with the
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a State (polity), state or formal monetary union, and oversees their commercial bank, commercial banking system. In contras ...
. Under the
fractional-reserve banking Fractional-reserve banking, the most common form of banking A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly perfo ...
system used in most countries, central banks typically set minimum
reserve requirement The reserve requirement (or cash reserve ratio) is a central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a State (polity), state or formal monetary union, an ...
s that require commercial banks under its purview to hold cash or deposits at the central bank equivalent to at least a prescribed percentage of their
liabilities Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, re ...
, 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 run A bank run (also known as a run on the bank) occurs when many clients withdraw their money from a bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneou ...
s. In general, banks do not earn any interest on their reserves. 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 Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
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 In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of good ...
and balances at central banks".


Terms

*Reserves on deposit (of a commercial bank): the deposit accounts for the commercial bank at the central bank. *Vault
cash In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of good ...
(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. *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. *
Excess reserves Excess reserves are bank reserves held by a bank in excess of a reserve requirement The reserve requirement (or cash reserve ratio) is a central bank A central bank, reserve bank, or monetary authority is an institution that manages th ...
: bank reserves in excess of the
reserve requirement The reserve requirement (or cash reserve ratio) is a central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a State (polity), state or formal monetary union, an ...
. A portion of excess reserves (or even all of them) may be desired reserves. *Free reserves: the amount by which excess reserves exceed borrowed reserves.Vogel 2001:421. *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.


Cash held by banks

Banking regulators typically determine the banks’
reserve requirement The reserve requirement (or cash reserve ratio) is a central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a State (polity), state or formal monetary union, an ...
s, including the minimum proportion of a bank’s assets that banks must hold in cash. Subject to such directives, banks tend to keep their cash reserves as low as is prudently necessary, as banks do not earn interest on it, and it is a cost to keep secure. In the United States such reserves are often called
vault Vault may refer to: * Jumping, the act of propelling oneself upwards Architecture * Vault (architecture), an arched form above an enclosed space * Bank vault, a reinforced room or compartment where valuables are stored * Burial vault (enclosure) ...
money. The amount of money needed to be at call varies because of a number of factors. For example, there is a higher demand at Christmas time when
commercial Commercial may refer to: * a dose of advertising conveyed through media (such as - for example - radio or television) ** Radio advertisement ** Television advertisement * (adjective for:) commerce, a system of voluntary exchange of products and se ...

commercial
activity is highest. Also, when workers were paid in cash, there was a higher demand on pay-day. There may also be sudden, unexpected surges in demand for cash by individuals during economic panics, which may result in a “
run on the bank A bank run (also known as a run on the bank) occurs when many clients withdraw their money from a bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneou ...
” as individuals seek to withdraw money from bank accounts. When banks find from time to time that their cash holdings are below the anticipated cash requirements, especially if they are below the prescribed minimum, they would either request cash from other banks that have surplus holdings or order cash from the monetary authority. When banks no longer believe they need as much cash on hand they would return the cash to the monetary authority, or offer the surplus to other banks.


Bank deposits at central bank

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.


Notes


See also

*
Capital requirement A capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simulta ...
*
Gold reserve A gold reserve was the gold Gold is a chemical element with the Symbol (chemistry), symbol Au (from la, aurum) and atomic number 79, making it one of the higher atomic number elements that occur naturally. In a pure form, it is a brightn ...
*
Monetary base In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...


References

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


External links


Documents and statistical releases related to banking reserves
available on FRASER
Bank reserve accounts as defined by the bank of England
Banking terms Monetary economics de:Zentralbankgeld