Bank reserves are a commercial

bank 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 performed by the bank or indirectly through capital markets. Because ...

'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 country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central b ...

. Under the

fractional-reserve banking Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, ...

system used in most countries, central banks typically set minimum

reserve requirement Reserve requirements are central bank regulations that set the minimum amount that a commercial bank must hold in liquid assets. This minimum amount, commonly referred to as the commercial bank's reserve, is generally determined by the centra ...

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, such as customer deposits. Such sums are usually termed required reserves, and any funds above the required amount are called

excess reserves Excess reserves are bank reserves held by a bank in excess of a reserve requirement for it set by a central bank. In the United States, bank reserves for a commercial bank are represented by its cash holdings and any credit balance in an account ...

. 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. 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 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, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-im ...

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

(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 for it set by a central bank. In the United States, bank reserves for a commercial bank are represented by its cash holdings and any credit balance in an account ...

: bank reserves in excess of the

. 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’

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 s ...

activity is highest. Also, when workers were paid in cash, there was a higher demand on payday. 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 or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system (where banks no ...

” as individuals seek to withdraw money from bank accounts. When banks find that their cash holdings are below the anticipated cash requirements, especially if they are below the prescribed minimum, they would either borrow cash from other banks that have surplus holdings (e.g., via the interbank market) or from the monetary authority (e.g., via the "discount window"). 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

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