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What are primary and secondary reserves?

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2010-06-20 05:59:09

Primary Reserves

Primary reserves consist of cash on hand in the bank and

deposits owed to it by other banks. These are also called the legal

reserves. From this cash on hand tellers are able to meet customer

demands for withdrawals, exchanges, and loans. Any excess reserves

may be invested in larger banks in the form of the loans; in the

United States these are called federal funds.

Total cash required to support the operations of a bank, legal

or mandatory reserve requirements, and uncollected checks. Primary

reserves cannot be loaned or invested, but may be used in a

liquidity crisis caused by sudden and heavy cash withdrawals by

bank's depositors.

Secondary Reserves

Assets invested in short-term marketable securities, usually

Treasury bills and short-term government securities.

"http://www.answers.com/topic/legal-reserve">http://www.answers.com/topic/legal-reserve

kept in a Federal Reserve Bank don't earn interest, but secondary

reserves are a source of supplemental liquidity. These earn

interest and can be used to adjust a bank's reserve position. If

loan demand is slow, deposit funds often are invested in short-term

securities that are easily converted to cash. Secondary reserves

are not listed as a separate balance sheet item.

Securities purchased by a bank for investment purposes are known

as secondary reserves. In the United States, much of this

investment is in municipals-bonds and notes issued by local or

state governments. Banks also buy bills, notes, and bonds issued by

the United States Treasury and securities issued by other federal

agencies. All such securities are low-risk investments. …

Priti Upadhyay( GZB) ( priti.up@gmail.com)


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