Bank Reserve
Bank reserves are the cash minimums that financial institutions must have on hand in order to meet central bank requirements. This is real paper money that must be kept by the bank in a vault on-site or held in its account at the central bank. Cash reserves requirements are intended to ensure that every bank can meet any large and unexpected demand for withdrawals.Historically, the reserve ratio has ranged from zero to 10% of bank deposits.
Bank Reserves
Definition: Bank reserves are the minimum cash reserves that financial institutions must hold to meet the requirements set by the central bank. These reserves can be actual currency that banks must keep in their vaults or hold in accounts at the central bank. The purpose of cash reserve requirements is to ensure that each bank can handle any large and sudden withdrawal demands.
Origin
The concept of bank reserves originated in the 19th century when the banking system began to develop, and central banks started requiring commercial banks to hold a certain percentage of deposits as reserves to ensure the stability of the financial system. Over time, central banks in various countries have continuously adjusted reserve ratios based on economic conditions and financial market needs.
Categories and Characteristics
Bank reserves are mainly divided into two categories: required reserves and excess reserves.
- Required Reserves: These are the minimum reserve requirements set by the central bank that banks must strictly adhere to.
- Excess Reserves: These are additional reserves that banks hold beyond the required reserves. Excess reserves can provide banks with an extra liquidity buffer.
Specific Cases
Case 1: During the 2008 financial crisis, the Federal Reserve significantly lowered the reserve ratio to increase the available funds for banks, helping to stabilize the financial market.
Case 2: During the COVID-19 pandemic in 2020, the People's Bank of China also adjusted the reserve ratio, lowering the required reserve ratio for small and medium-sized banks to support economic recovery.
Common Questions
Question 1: Why do central banks set reserve requirements?
Answer: Reserve requirements are set to ensure that banks have enough liquidity to meet customer withdrawal demands, preventing bank runs and financial crises.
Question 2: How do changes in the reserve ratio affect banks?
Answer: Increasing the reserve ratio reduces the funds available for banks to lend and invest, while lowering the reserve ratio increases the available funds, promoting economic activity.
