Reserves

10 Key excerpts on "Reserves"

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  Economic Areas Under Financial Stability

  • Indranarain Ramlall(Author)
  • 2018(Publication Date)
  • Emerald Publishing Limited

    (Publisher)

  It is of paramount significance to note that the building up of Reserves tends to be a coveted task for countries which are deficient in natural resources as only Reserves can act as buffer to cushion these countries from external shocks. Countries which have resources based on natural resource endowments tend to be subject to less stressful conditions in the case of external shocks as they can deplete these resources to accommodate for any pressing external repayments.

  Since banks often lie at the apex of the financial intermediation roles in many parts of the world, banks’ Reserves necessitate a meticulous analysis in the form of liquidity Reserves and capital Reserves. Unfortunately, neither liquidity Reserves nor capital Reserves were ample to cushion the detrimental impacts of the global financial crisis on the banks. To cater for such a deficiency, liquidity Reserves in the form of net stable funding ratio and liquidity coverage ratio have been recommended by Basel III. Similarly, to remedy for the fact that both liquidity and capital Reserves were not effective in dealing with different phases of the business cycles, the countercyclical capital buffer has been introduced by Basel III. Likewise, a capital surcharge has been recommended by Basel III to cope with systemically important financial institutions.

  3.2. Definition of Reserves

  Reserves can be defined as the holding of assets to meet any unforeseen contingencies as and when they fall due. Such a definition signifies that different asset types such as currencies, fixed deposits, real estates, commodities and exchange traded funds can all fall under the purview of Reserves. The type of assets held under Reserves will vary as per the group of economic units under focus. For instance, Reserves held by a household will tend to be more tilted towards real estate assets while those held by central banks will tend to be more tilted towards foreign assets such as internationally accepted currencies and gold. In essence, Reserves are held by households, banks, governments, corporates and even central banks. At the economy level, Reserves can be endowed or acquired. Endowed Reserves constitute Reserves which can easily be mined in an economy such as gold mines in South Africa. Acquired Reserves represent Reserves which are acquired following strenuous economic activities unleashed by a country such as the presence of a robust exporting sector which brings in regular inflows of foreign currencies. Robust holdings of Reserves by a specific economic unit enables the latter to best cope with unanticipated shocks likely to generate detrimental impacts, and with these impacts differing as by the type of economic unit under scrutiny. For banks, the shocks manifest in the form of capital erosion, for households, the shocks take the form of subdued probability of being solvent on loans, for corporates, the shock take the form of undermined repayment capacity on loans and, finally, for government, the shocks culminate into heightened public debt levels.

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  Economics of the International Financial System

  • Sukumar Nandi(Author)
  • 2017(Publication Date)
  • Taylor & Francis

    (Publisher)

  Since the late 1950s, many papers have been written on the theme of international reserve, and these come under broadly two categories: The world reserve problem and how the IMF would solve the problem of inadequate world-level liquidity, so that rising trade among the member countries are not adversely affected; the second channel of research continued regarding the optimal level of reserve from the stand point of a single country. The latter problem has assumed importance in view of the floating exchange rate regime established after the collapse of the Bretton Woods Agreement in the early 1970s. There are at least eight reviews of the literature on the subject since 1960 and these are: Clower and Lipsey(1968), Niehans (1970), Salant (1970), Grubel (1970), Williamson (1973), Aizenman and Marion (2003), and Aizenman and Lee (2007).

  Almost all the studies explain that countries hold international reserve so that they can meet sudden temporary excess demand for foreign exchange and/or to meet short-run adjustment in the balance of trade. The central banks often intervene in the foreign reserve market by selling/buying foreign exchange. International Reserves are defined to be assets or credits which can be used directly for intervention, or which can be converted into foreign exchange quickly and with certainty. In practice, it has been necessary to pick up arbitrary cut-off point on such a scale, and define international reserve as assets which are acceptable at all times to foreign economic agents (Machlup, 1966). IMF has to forward estimates of international reserve and these estimates have been widely used in literature for different purposes (Clark, 1971; Flanders, 1971; Kelly, 1970).

  A country can have international reserve at the macro level and also private liabilities towards foreign exchange. Some authors consider whether international reserve should be adjusted for such private liabilities (Brown, 1964; Kenen and Yudin, 1967). In the monetary theory literature, portfolio theory and financial intermediation have been developed and these tools have been used to explain the movement of international reserve in Kane (1965). Such a framework has some relevance with the discussion in Machlup (1966) and the studies of reserve assets composition (Hageman, 1969; Kenen, 1963). The portfolio model employed in Hageman computed stock-adjustment equation for 11 major countries on quarterly data of the 1950s and early 1960 and the study found good evidence that adjustment was far from instantaneous.

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  Problems of international Money, 1972-85

  • International Monetary Fund(Author)
  • 1996(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  These recent movements in reserve holdings are only one aspect of the evolution of international liquidity. An equally important factor has been the curtailment of the access of many countries to international financial markets during 1981 and 1982, which has sharply reduced the current and future availability of borrowed Reserves. Moreover, it appears that access to markets may be restored only slowly for most of these countries. The reduced availability of borrowed Reserves has meant that a number of countries have been able to increase their reserve holdings only through policies that generate current account surpluses.

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  The Historical Role of Reserves

  The view that the evolution of reserve holdings is exogenous to the system and that the supply of Reserves is an important determinant of economic policies is most appropriate in the context of a classical gold standard. Theoretically, in that system the physical stock of the reserve asset—gold, or some good substitute—is determined by mining technology while its nominal value is determined by fixing the price of gold in terms of national currencies. In issuing national currencies, governments had to take into account their obligation to convert currencies into gold at the fixed price. An excessive issue of currency, for example, led to a drain on Reserves if market participants came to doubt that the convertibility obligation could be maintained. In such a system, the growth in the nominal value of the supply of Reserves relative to the growth in demand for them is a central issue. If real economic activity grew more rapidly than the real gold stock or its substitutes, demand would have been greater than supply, leading to deflationary pressures.

  In practice, the link between domestic monetary policies and the global supply of Reserves was probably never as direct as suggested by this theoretical model. Indeed, the gold exchange standard as it existed in the Bretton Woods System can be seen as a gradual evolution away from the strict subservience of economic policies to changes in gold holdings. In particular, governments resorted to a variety of credit arrangements both among themselves and with private credit markets in order to soften the link between their economic policies and the constraint on these policies provided by the need to maintain convertibility.

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  The International Monetary System

  Highlights From Fifty Years Of Princeton's Essays In International Finance

  • Peter B Kenen(Author)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  Instead of accepting the preferences of governments, it seeks to evaluate them in the light of ultimate cri-teria. In any event, consensus between governments is unattainable, and the dictatorial judgments of economists may help to provide the basis of a reasonable compromise. Reserve changes generally exercise their effects on world real income through national monetary and fiscal policies, such as those affecting imports, capital exports, and exchange rates. There are some exceptions to this general rule. For example, such changes may act on the minds of private individuals by inspiring a greater or lesser degree of confi-dence in exchange stability. But even in this instance-and granting that hot-money movements have a direct impact on economic life-the ulti-mate effects on real income are largely mediated through national 1 International Liquidity: Ends and Means, Staff Papers, Vol. VIII ( 1960-61), pp. 439-463. 71 72 ]. Marcus Fleming policies. However, as is explained later, if reserve changes as such act through national policies, the processes through which Reserves come into existence or are acquired by countries may act more directly on the level of monetary demand. CRITERIA FOR OPTIMIZATION Other things being equal, the higher the level of a country's Reserves and the better its prospects of increasing them in the future, the more inclined the country will be to adopt policies that, inter alia, worsen its balance of payments. Thus, higher Reserves will encourage a country to adopt more expan-sionary monetary and fiscal policies, relax restrictions on imports or even promote them, relax promotion of exports or even restrict them, relax restrictions on capital exports, restrict capital imports, be more willing to provide capital exports and aid in untied form, be more generous in the provision of foreign aid, or be less willing to devalue and more willing to revalue the rate of exchange.

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  The Exorbitant Burden

  The Impact of the U.S. Dollar's Reserve and Global Currency Status on the U.S. Twin-Deficits

  • Taranza T. Ganziro, Robert G. Vambery(Authors)
  • 2016(Publication Date)
  • Emerald Group Publishing Limited

    (Publisher)

  The key to both exchange convenience and capital cer-tainty is a well-developed, deep and open fi nancial market (Cohen, 2011 ). These qualities are evidenced in the cross-border foreign cur-rency liabilities of banks that have substantially grown over the past decade in which the dollar remains the king of the cross-border lend-ing markets to both bank and nonbank customers remains at a sub-stantial share of around 60% ( Goldberg, 2011 ). 2.1.7.7. The U.S. dollar dominates foreign Reserves holdings Reserve assets including gold, SDRs, and a small handful of cur-rencies, but heavily dominated by dollar-denominated assets serve mainly as a medium of intervention by central banks against global fi nancial shocks that can derail the value of their domestic markets. The overall global foreign Reserves have been trending up and sex-tupled to nearing $12 trillion (around 15% of world GDP) in 2014 from $1.6 trillion (5% of world GDP) in 1999. For obvious motives we discussed above especially self-insurance and the strategy to limit the appreciation pushups of their currency exchange rates the emerging markets are expected to hold much more Reserves at greater accumulation rate than the developed countries. According to the IMF-COFER data, they hold two-thirds of the total world Reserves. The above numbers are staggering and denote how the global fi nancial instability never leaves the minds of the monetary authorities. All exchange rate regimes involve some degree of gov-ernment intervention in the exchange market, whether modest or substantial except in rare cases of absolute free fl oat (Cohen, 2011 ). The question is which reserve assets are the most indicated to be not only the best medium of intervention but also the best assets to hold the value. Literature Review 37 Although with a diminished relative importance, the U.S.

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  Payment Systems in Global Perspective

  • Maxwell J. Fry(Author)
  • 1999(Publication Date)
  • Taylor & Francis

    (Publisher)

  Central banks that target the level of bank Reserves usually try to achieve the objective by influencing short-term interest rates. However, it is possible to lose control over short-term interest rates when targeting bank Reserves. Situations can exist and have existed where large players have attempted and even succeeded in cornering the reserve market. Short-term interest rates may also be influenced by efforts to deliberately incur a shortfall in required Reserves. It is clearly in the interests of the central bank to deter such practices in one way or another.

  5.3Reserves and the Payment System

  Before central banks embraced the role of lender of last resort, commercial banks held Reserves to meet withdrawals, to make payments and because even a rumour about a reserve shortage could trigger a run on them by depositors. One of the original reasons for establishing central banks was to pool Reserves to make banks more secure and at the same time to reduce the amount of Reserves banks needed to hold (Bagehot 1873).

  In the early days of central banking, banks were required to hold Reserves both for prudential reasons and for monetary control. Recently reserve requirements have been reduced in France, Japan, Sweden and the United States, and eliminated in Belgium, Canada, Kuwait, Mexico, Norway, Switzerland and the United Kingdom. So now some banks hold Reserves only by accident. These banks depend heavily on interbank credit and the money market to settle their payments and to dispose of any excess Reserves. However, Reserves can be useful to payment systems. In particular, in countries where central bank intraday overdrafts are not granted or overnight overdrafts are severely penalised, banks need to keep some Reserves to settle their payments. Three basic approaches to meeting the demand for Reserves are discussed in the following sections. A country can also adopt any combination of these approaches.

  5.3.1Reserve requirements

  Required reserve regimes were imposed to control the size of some monetary aggregate rather than for payment purposes. However, most countries using reserve requirements allow these Reserves to provide liquidity for the payment system, as shown by the questionnaire results. To free Reserves for payment purposes, banks are usually allowed to meet their requirements on an average basis over some maintenance period as, for example, in Poland, Tanzania and the United States.

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  Advances in Monetary Policy and Macroeconomics

  • P. Arestis, G. Zezza, P. Arestis, G. Zezza(Authors)
  • 2007(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  3 Given the expected behaviour of balance of payment flows and a Central Bank policy rule, future levels of Reserves are determined. The complete model allows the computation of forecasts for international Reserves and the probability of a crisis. Simulating stochastic shocks in the exogenous variables of the model, we can retrieve probability distributions on these variables. Establishing policy makers’ preferences on them, defines risk as the chances of missing the desired accumulation of Reserves or of facing extremely high possibilities for an external collapse. To assess the degree of optimality of forecasted international Reserves requires imposing a definition of ‘optimal Reserves’. Empirically, there are several grounds for which countries rationalize the accumulation of foreign Reserves. 4 Theoretically, Reserves are mostly treated as an inventory and opti- mal Reserves must minimize the costs associated. 5 In this chapter we follow a variation developed by García and Soto (2004) in which optimal Reserves minimize the expected costs, and the probability of a crisis depends upon the behaviour of several macroeconomic variables – among them, the ratio of for- eign debt to Reserves. Additionally, we compare optimal Reserves to forecasted Reserves in order to asses to what extent optimality is achieved. Risk arises when, according to the preferences of policy makers, suboptimality exceeds established thresholds. The suggested measures of risks have the attribute of conveying all the relevant information from different sources of uncertainty, and of changing through time according to the state of the economy. These characteristics endow policy makers with sufficient information, not only to achieve a proper assessment of the nature of risks faced, but also to compare differ- ent policy regimes on the basis of the risks implied.

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  Central Banks at a Crossroads

  What Can We Learn from History?

  • Michael D. Bordo, Øyvind Eitrheim, Marc Flandreau, Jan F. Qvigstad(Authors)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  29 Since such ambitions required following the example of the United States and Britain, the stabilization law of 1928 therefore defined Reserves as comprising solely gold, although the Bank of France also held very large amounts of foreign exchange beyond the statutory gold reserve (Bouvier 1989, Mouré 2002). 30 Holding Reserves exclusively in gold was the hallmark of a key-currency country. At the same time, accumulating sterling and dollars was tempting, for it promised financial returns. Torn between these objectives, the Bank of France alternated between accumulating foreign exchange and seeking to liquidate its holdings. After having held at one point nearly half of 29 See Einzig (1931) and, further, Myers (1936). 30 For a view emphasizing Gallic incompetence and malice, see Johnson (1997) and Irwin (2012). 300 Barry Eichengreen and Marc Flandreau world’s foreign exchange Reserves, the Bank ended up incurring large losses when Britain abandoned the gold standard in 1931 before French central bank could dispose of its sterling (Accominotti 2009). 5.3 Market Liquidity as a Two-Edged Sword The Bank of France’s losses were not unique, Belgium and the Netherlands being other cases in point. Gone now were the dull days of the nineteenth century when the bulk of Western foreign exchange transactions took place within the narrow margins of the gold points. Even then there had been excitement in markets for so-called “peripheral” currencies, such as the Austro-Hungarian florin in the 1870s or the Argentine peso in the 1890s. But these problems were essentially limited to the local market (Vienna and Buenos Aires respectively). In addition, the forward market existed to provide hedging instruments that investors could use to protect themselves (Flandreau and Komlos 2006). 31 But now the markets developed further, as did the risks.

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  Introduction to Finance

  Markets, Investments, and Financial Management

  • Ronald W. Melicher, Edgar A. Norton(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  When bank Reserves differ from required Reserves, a depository institution has either excess Reserves or deficit Reserves. Excess Reserves occur when the amount of a depository institution’s bank Reserves exceed required Reserves. If required Reserves are larger than the bank Reserves of an institution, the difference is called deficit Reserves. The banking system will have excess Reserves if the cumulative amount of bank Reserves for all depository institutions exceeds the total required Reserves amount. Two kinds of factors affect total Reserves: those that affect the currency holdings of the banking system and those that affect deposits at the Fed. Currency flows in response to changes in the demand for it by households and businesses. Reserve balances are affected by a variety of transactions involving the Fed and banks, and that may be initiated by the banking system or the Fed, the Treasury, or other factors. Although the Fed does not control all of the factors that affect the level of bank Reserves, it does have the ability to offset increases and decreases. Thus, it has broad control over the total Reserves avail- able to the banking system. Figure 5.2 provides a summary of the transactions that affect bank Reserves. Discussion of these transactions follows. 5.7.1 CHANGES IN THE DEMAND FOR CURRENCY Currency flows into and out of the banking system affect the level of Reserves of the banks receiving the currency for deposit. Let’s assume that an individual or business finds they have excess currency of $100 and deposit it in Bank A. Deposit liabilities and the Reserves of Bank A are increased by $100. The bank now has excess Reserves of $80, assuming a 20% level of required Reserves. These Reserves can be used by the banking system to create $400 in additional deposits. If the bank does not need the currency but sends it to its Reserve Bank, it will receive a $100 credit to its account. The volume of Federal Reserve notes in circulation is decreased by $100.

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  Federal Reserve Policy Reappraised, 1951–1959

  • Daniel S. Ahearn(Author)
  • 2019(Publication Date)
  • Columbia University Press

    (Publisher)

  . . . Variations in cash reserve ratios have become more fre-quent in recent years, as many countries have increasingly turned to this in-strument as a part of flexible credit policies. See, Fousek, Foreign Central Banking: The Instruments of Monetary Policy, Ch. IV, particularly pp. 46, 50. 2 On December 1, 1960, member banks' legally required Reserves amounted to some $18 billion, of which all except about $2 billion of vault cash was required to be kept at the Federal Reserve Banks. 146 USE OF MONETARY INSTRUMENTS TABLE 6 MEMBER BANK RESERVE REQUIREMENTS, DECEMBER, 1960 LEGAL LIMIT (percent of deposit) AMOUNT REQUIRED (S million) Maxi- Mini-mum mum In Force b Per Average c Point Net Demand Deposits' Central Reserve City banks Reserve City banks Country banks Time Deposits All classes of banks 22 10 16V2 22 10 16V2 14 7 12 6 3 5 4,136 251 6,612 401 4,583 382 2,889 578 * Net demand deposits are defined as total demand deposits less cash items in process of collection and less demand deposits due from domestic banks. As of December 1, 1960. c For first fourteen days of December, 1960. Source: Board of Governors of the Federal Reserve System, Federal Reserve Bulletin, XLVII (March, 1961), 313, and Release J.l Deposits, Reserves, and Borrowings of Member Banks, for the biweekly period ended December 14, even beyond the minimum intervention achieved by confining open market operations to dealings in bills only. This is because changes in reserve requirements, releasing or impounding reserve funds, would be dealings in cash itself, rather than the nearest thing to cash, as Sproul pointed out in 1954.

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