Bank reserves
Barron's Banking Dictionary:
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Bank Reserves
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.
Investopedia Financial Dictionary:
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Bank Reserve
Bank reserves are the currency deposits which are not lent out to the bank's clients. A small fraction of the total deposits is held internally by the bank or deposited with the central bank. Minimum reserve requirements are established by central banks in order to ensure that the financial institutions will be able to provide clients with cash upon request.
Investopedia Says:
The main purpose of holding reserves is to avoid bank runs and generally appear solvent. Central banks place these restrictions on banks, because the banks can earn a much larger return on their capital by lending out money to clients rather than holding cash in their vaults or depositing it with other institutions. Bank reserves decrease during periods of economic expansion and increase during recessions.
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Wikipedia on Answers.com:
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Bank reserves
Bank reserves are banks' holdings of deposits in accounts with their central bank (for instance the European Central Bank or the Federal Reserve, in the latter case including federal funds), plus currency that is physically held in the bank's vault (vault cash). The central banks of some nations set minimum reserve requirements. Even when no requirements are set, banks commonly wish to hold some reserves, called desired reserves, against unexpected events such as unusually large net withdrawals by customers or even bank runs.
The Bank of England uses the term rest to describe the same concept.
Terms
- Reserves on deposit – deposit accounts at the central bank, owned by banks.
- Vault cash – reserves held as cash in bank vaults rather than being on deposit at the central 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 that banks are required to hold, determined by the central bank as a function of a bank's deposit liabilities.
- Excess reserves - bank reserves in excess of the reserve requirement.
- Free reserves - the amount by which excess reserves exceed borrowed reserves. (Vogel 2001:421)[1]
- Total reserves – all bank reserves: vault cash plus reserves on deposit at the central bank, also borrowed plus non-borrowed, also required plus excess.
See also
References
Vogel, Harold L. (2001). Entertainment Industry Economics: A Guide for Financial Analysis. New York: Cambridge University Press. ISBN 0-521-79264-9
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Barron's Banking Dictionary
Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.
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Investopedia Financial Dictionary
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Mentioned in
Credit Control
(in banking)
Required Reserve Rate
(finance term)
Fractional Reserves
(in banking)
Vault Cash
(in banking)
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