reserves

(noun)

Banks' holdings of deposits in accounts with their central bank, plus currency that is physically held in the bank's vault.

Related Terms

Examples of reserves in the following topics:

  • The Reserve Requirement

    • The Federal Reserve is in charge of setting reserve requirements for all depository institutions in the country.
    • The Federal Reserve can adjust reserve requirements by changing required reserve ratios, the liabilities to which the ratios apply, or both.
    • Changes in reserve requirements can affect the money stock, by altering the volume of deposits that can be supported by a given level of reserves, and bank funding costs.
    • Unless it is accompanied by an increase in the supply of Federal Reserve balances, an increase in reserve requirements (through an increase in the required reserve ratio, for example) reduces excess reserves, induces a contraction in bank credit and deposit levels, and raises interest rates.
    • Conversely, a decrease in reserve requirements, unless accompanied by a reduction in Federal Reserve balances, initially leaves depository institutions with excess reserves, which can encourage an expansion of bank credit and deposit levels and reduce interest rates.

  • The Fractional Reserve System

    • A fractional reserve system is one in which banks hold reserves whose value is less than the sum of claims outstanding on those reserves.
    • The fraction of deposits that a bank must hold as reserves rather than loan out is called the reserve ratio (or the reserve requirement) and is set by the Federal Reserve.
    • Any reserves beyond the required reserves are called excess reserves.
    • Excess reserves plus required reserves equal total reserves.
    • First, it can adjust the reserve ratio.

  • Adjusting for LIFO Reserve

    • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
    • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
    • This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
    • The SEC requires that all registered companies that use LIFO report their LIFO reserves for the start and end of the year.
    • Explain how the LIFO reserve is calculated and how to report it on the financial statements

  • Reserve Requirement

    • Fed can use reserve requirements as a monetary tool.
    • Reserve requirements are the ratio of reserves to deposits that banks must hold to satisfy depositors' withdrawals.
    • Consequently, the Fed can increase the reserve requirement ratio, switching some excess reserves to required reserves.
    • Required reserves impose a cost to the banks because they cannot lend these reserves to borrowers, and therefore, do not earn interest income on required reserves.
    • Moreover, banks would still hold reserves to meet depositors' withdrawals if a central bank did not impose reserve requirements.

  • The Reserve Ratio

    • The reserve ratio is the percentage of deposits that a bank is required to hold in reserves, or funds that are not allowed to be loaned.
    • The required reserve ratio is a tool in monetary policy, given that changes in the reserve ratio directly impact the amount of loanable funds available .
    • Money growth in the economy can occur through the multiplier effect resulting from the reserve ratio.
    • For example, a reserve ratio of 20% will result in 80% of any given initial deposit being loaned out and if the process of loaning is assumed to continue, the maximum increase in money expansion specific to an initial deposit at a 20% reserve ratio will be equal to the reserve multiplier 1/(reserve ratio) x the initial deposit.
    • The Federal Reserve is charged with maintaining sustainable economic growth.

  • Introduction to the Federal Reserve

    • The Federal Reserve System is the central banking system of the United States, which conducts the nation's monetary policy.
    • The Federal Reserve System (also known as the Federal Reserve, or the "Fed") is the central banking system of the United States.
    • Over time, the roles and responsibilities of the Federal Reserve System have expanded, and its structure has evolved.
    • Monthly changes in the currency component of the U.S. money supply as reported by the Federal Reserve
    • Describe the primary function and objectives of the Federal Reserve System

  • Structure of the Federal Reserve

    • The Federal Reserve (the Fed) was designed to be independent of the Congress and the government.
    • The Federal Open Market Committee (FOMC), composed of the seven members of the Federal Reserve Board and five of the 12 Federal Reserve Bank presidents, which oversees open market operations, the principal tool of U.S. monetary policy.
    • Twelve regional Federal Reserve Banks located in major cities throughout the nation, which divide the nation into twelve Federal Reserve districts.
    • The Federal Reserve Banks act as fiscal agents for the U.S.
    • Recall the structure of the Federal Reserve System of the United States

  • The LIFO Reserve

    • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
    • Under this system, the business may maintain costs under FIFO but track an offset in the form of a LIFO reserve.
    • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
    • The change in the balance in the LIFO reserve will also increase the current year's cost of goods sold.
    • The accounting profession has discouraged the use of the word reserve in financial reporting, so LIFO reserve may sometimes be called: Revaluation to LIFO, Excess of FIFO over LIFO cost, or LIFO allowance.

  • Example Transactions Showing How a Bank Can Create Money

    • When a bank's excess reserves equal zero, it is loaned up.
    • Anderson will loan out the maximum amount (90%) and hold the required 10% as reserves.
    • When banks in the economy have made the maximum legal amount of loans (zero excess reserves), the deposit multiplier is equal to the reciprocal of the required reserve ratio ($m=1/rr$).
    • Thus, with a required reserve ratio of 0.1, an increase in reserves of $1 can increase the money supply by up to $10 .
    • The graph shows the total amount of money that can be created with the addition of $100 in reserves, using different reserve requirements as examples.

  • The Money Multiplier in Theory

    • That is, in a fractional-reserve banking system, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) is a multiple of reserves; this multiple is the reciprocal of the reserve ratio.
    • We can derive the money multiplier mathematically, writing M for commercial bank money (loans), R for reserves (central bank money), and RR for the reserve ratio.
    • We start with the reserve ratio requirement that the the fraction of deposits that a bank keeps as reserves is at least the reserve ratio:
    • In theory banks should always lend out the maximum allowed by their reserves, since they can receive a higher interest rate on loans than they can on money held in reserves.
    • A 10% reserve requirement creates a total money supply equal to 10 times the amount of reserves in the economy; a 20% reserve requirement creates a total money supply equal to five times the amount of reserves in the economy.