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 m ...

'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, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

. In most countries, the Central bank may 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 Bank reserves, commercial bank's reserve, is generally determined ...

s 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 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 accoun ...

. 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 or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking sys ...

s. Traditionally, central banks do not pay

interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...

on reserve balances, but such schemes have become increasingly common in the 21st century. 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 book-keeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-i ...

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 accoun ...

: 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 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: * (adjective for) commerce, a system of voluntary exchange of products and services ** (adjective for) trade, the trading of something of economic value such as goods, services, information or money * a dose of advertising ...

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 fail in the near future. In other words, it is when, in a fractional-reserve banking system (where banks normally only ...

" 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