Bank Reserves
Bank reserves refer to the funds that financial institutions are required to hold in reserve to meet potential withdrawals and liabilities. These reserves are typically held in the form of cash or deposits with the central bank. By regulating the level of reserves, central banks can influence the money supply and control inflation.
5 Key excerpts on "Bank Reserves"
eBook - ePubBusiness
The Ultimate Resource
- Bloomsbury Publishing(Author)
- 2011(Publication Date)
...Deposits in excess of $44.3 million are subject to 10 percent reserve requirement. These breakpoints are reviewed annually in accordance with money supply growth. No reserves are required against certificates of deposit or savings accounts. The reserve ratio requirement limits a bank’s lending to a certain fraction of its demand deposits. The current rule allows a bank to issue loans in an amount equal to 90 percent of such deposits, holding 10 percent in reserve. The reserves can be held in any combination of vault cash and deposit at a Federal Reserve Bank. A bank facing a reserve deficiency has several options. It can try to borrow reserves for one or more days from another bank, sell marketable assets such as government securities, or bid for funds in the money market, such as large CDs or Eurodollars. As a last resort, it can pledge collateral and borrow at the Federal Reserve’s discount window. In order to meet deposit withdrawal contingencies, many banks maintain a margin of excess reserves above the required reserve ratio, since the required reserves are really not available to meet withdrawal liquidity needs. Excess reserves are higher than those needed to meet reserve and clearing requirements, and provide extra protection against overdrafts and deficiencies in required reserves. TRICKS OF THE TRADE • Because reserves earn no interest, they have an adverse effect on bank earnings. • In practice, the required reserve ratio has been adjusted only infrequently by the US Federal Reserve Board. • US depository institutions hold required reserves in one of two forms: vault cash on hand at the bank or—more significant for monetary policy—required reserve balances in accounts with the Reserve Bank for their respective Federal Reserve District. FOR MORE INFORMATION Web Site: Investopedia.com: www.investopedia.com “Avarice, the spur of industry.” David Hume...
eBook - ePub- Thomas Crump(Author)
- 2011(Publication Date)
- Routledge(Publisher)
...183), which then end up, to a substantial extent, as part of the assets of the Bank of England and the rest of the banking system. The idea behind the management of the account is that the reserve position of the Bank of England is to some degree insulated from the effects of fluctuations in exchange rates, and in recent years in the price of gold. At the present time the official reserves of gold 15 and foreign currencies far exceed in value the total assets of the Bank of England. 16 Seeing the veil which separates these reserves from the banking system, it is difficult to say what part of them may be regarded, indirectly, as part of its reserves, including those of the Bank of England. The position is clearer in a country like the Netherlands, where the balance sheet assets of the central bank include a very substantial holding of gold. 17 In this case however the central bank’s interest in foreign currencies takes the form of foreign government securities, consisting, in practice, largely of United States Treasury bills. Holdings of the currencies themselves are to be found with the commercial banks, where they are very substantial. 18 The reserves of the central bank The question of reserves is not one whose relevance is confined to the backing of a country’s note issue: this is, after all, only a part of the money supply for which the central bank is responsible. The point is that the ultimate reserves of a banking system, no matter the extent to which they are held by the central bank, can consist, at the present time, only of foreign currencies of gold. 19 In the case of foreign currencies, the question arises as to which are suitable to be held as a part, at least, of the reserves of any national banking system. In recent years, the only currency recognized everywhere as playing this role has been the American dollar, 20 which explains, incidentally, the preference of the Nederlandse Bank for holding United States Treasury bills...
eBook - ePubThe European Monetary Union
A Commentary on the Legal Foundations
- Helmut Siekmann, Helmut Siekmann(Authors)
- 2021(Publication Date)
- Hart Publishing(Publisher)
...It only confirms the Eurosystem’s duty of observance of the principle of an open market economy with free competition when applying a restrictive market instrument of monetary policy. 9 3 The Bundesbank Act in the version valid until the end of 1998 contained rules regarding minimum reserve requirements and can be seen as an inspiration for comparable rules contained in Article 19. 10 Besides the Deutsche Bundesbank, a number of other central banks of Member States of the Union, 11 as well as the Federal Reserve 12 and the Bank of Japan, 13 used or use minimum reserve requirements as a standard monetary policy instrument. 14 4 Article 19.1 (not the competences of the Council pursuant to Article 19.2) can be amended by the simplified amendment procedure according to Article 129.3 TFEU (Article 40.1 Statute). B. General Significance I. Objectives and Relevance of Minimum Reserve Requirements 5 Minimum reserve requirements are a standard Eurosystem monetary policy tool for the performance of money market management and monetary control functions. 15 They aim at stabilising money market interest rates and creating or enlarging a structural liquidity shortage (structural deficit of central bank liquidity). 16 By giving institutions an incentive to smooth. the effects of temporary liquidity fluctuations, the “average principle” 17 of the Eurosystem minimum reserve system supports the stabilisation of money market interest rates. 18 The “average principle” also prevents a strong volatility of the overnight rate as it enables institutions to satisfy short-term demands on central bank liquidity with their minimum reserve holdings. 19 Minimum reserve requirements also ensure the dependency of credit institutions on central bank refinancing operations by increasing the demand for central bank liquidity. 20 This demand facilitates the conduction of monetary policy, e.g...
eBook - ePub- Sukumar Nandi(Author)
- 2017(Publication Date)
- Routledge India(Publisher)
...Also factors like rigidities introduced by debt payments, volatility in the prices of primary factors in trade, and the inability of the poorer countries to attract short-term capital inflow, all these justify the greater need for maintaining higher reserve for the developing countries. 14.4 Reasons for Holding Reserve Though in normal circumstances a country should hold a certain amount of reserve, the holding of it is not costless. The opportunity cost of holding reserve is the differential income the country is to forego, which is the difference between the productivity of capital when invested domestically and the interest earned through the holding of the reserve. Still, there are important reasons why reserve should be held. At least three reasons are cited in the literature. First, holding of reserve gives credibility to the monetary authority regarding financial strength. A visible strong financial position will prevent flight from the currency, whether it is by residents or non-resident creditors who might otherwise be tempted to sell a currency short. Further, a national ‘fiat’ currency should be backed, at least partially, so that monetary authority remains ready to keep the promise of converting the liquidity liabilities (currency) into foreign exchange when desired. Also a large reserve enables the country to borrow foreign capital and enhance the liquidity by a multiplier if the country faces the possibility of capital flight. Second, a certain level of reserve of the country can be used against ‘the contingency that the country may some day want to absorb resources from the rest of the world at a time when it cannot borrow or liquidate other foreign asset’ (Cooper, 1968)...
eBook - ePubUnderstanding Central Banking
The New Era of Activism
- David M Jones(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...1 History and Purpose of Central Banking Reduced to its essence, central banking is critical in maintaining an orderly modern economy, but it has proved to be more art than science. No matter how sophisticated the analysis of the impact of monetary policy on the financial markets and how they, in turn, influence spending, output, employment, and inflation, central banking comes down to a process of trial and error, observation and adjustment. To be sure, only central banks have the special power to increase aggregate liquidity in their respective financial systems. Moreover, reasonably independent central banks like our Federal Reserve (the Fed) can react more promptly to financial crises than slow-moving legislatures or other government agencies on the fiscal side. Nevertheless, when fighting financial crises, it has been the Bernanke Fed’s artful innovation, timing, and the unexpectedly large scale of its actions that have saved the day, steering us away from a second Great Depression while rebuilding shattered market confidence. In short, it was Fed chairman Ben Bernanke’s willingness “to do whatever it takes” that kept the U.S. economy afloat, as emphasized by David Wessel in his excellent book, In FED We Trust: Ben Bernanke’s War on The Great Panic (2009). L ENDER OF L AST R ESORT Traditionally, central banks have been viewed as lenders of last resort. The central bank is the institution that your commercial bank turns to in a financial crisis when it is under assault by depositors and short-term bank debt holders demanding immediate cash in return for these bank liabilities. The Bank of England—founded in 1694 as the nation’s official bank, early debt manager, and clearinghouse—has successfully refined its role as a lender of last resort over the years and thus could be considered the bloodline ancestor of modern central banking. The Bank of England was nationalized in 1946, and subsequently became an independent public organization in 1997...
