Published Aug 21, 2023 Bank reserves are funds that banks are required to hold in reserve in order to meet their obligations to their customers. That means they are funds that banks must keep on hand in order to meet their customers’ withdrawal requests and other obligations. Bank reserves are typically held as cash or deposits at the central bank. To illustrate this, let’s look at a small bank with $100 million in deposits. In order to meet its obligations to its customers, the bank must keep a certain amount of reserves on hand. Let’s assume the reserve requirement is 10% (see also fractional reserve banking). That means the bank must keep $10 million in reserves. The remaining $90 million can be used to make loans or investments. Now, if the bank’s customers make a large withdrawal of $20 million, the bank must have enough reserves to cover the withdrawal. If it doesn’t, it must borrow from other banks or the central bank in order to meet its obligations. Bank reserves are an important part of the banking system. They ensure that banks have enough funds on hand to meet their obligations to their customers. This helps to maintain the stability of the banking system and prevents banks from becoming insolvent. In addition, bank reserves also play an important role in the implementation of monetary policy. By changing the reserve requirement, the central bank can influence the amount of money in circulation and, thus, the level of inflation.Definition of Bank Reserve
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Why Bank Reserve Matters
Financial Economics