Bank deposits allocated for a specific purpose. Legal Reserves are funds that banks maintain in a noninterest earning account at a Federal Reserve Bank or at a correspondent bank, plus vault cash, to meet their Reserve Requirements. Legal reserves protect depositors' assets, and also permit the Federal Reserve System to more easily regulate bank credit, the funds that banks have available for lending, by controlling the total supply of reserves in the banking system through Federal Reserve Monetary Policy.
Loan Loss Reserves a percentage of outstanding loans, are kept in a separate account to cover anticipated loan losses. When interest payments on a loan have not been made for a reasonable period, usually 90 days, the loan is no longer considered an earning asset and a reserve is set aside to cover the expected loss. If this loan is later written off as a worthless asset, a charge is made against the reserve for loan losses.
Primary Reserves are checking account balances in a Federal Reserve Bank, vault cash, plus checks in the process of collection; Secondary Reserves are mostly marketable short-term securities, such as U.S. Treasury bills, that are easily convertible to cash. See also Earmarked Reserves.
