What are reserve requirements?

Reserve requirements concerns the amount of money that financial institutions such as the bank must in reserve against deposits and notes made by customers of the institution. This amount of funds that must be in reserve are sometimes referred to as the reserves required . The idea of ​​reserve requirements is to increase the chances that banks will remain financially stable, although the general economy will experience a certain type of long -term decline.

As regards the maintenance of funds at hand, the reserves requirements can be physically held in a vault of a local bank or branch, or will be held at the closest point of the central or federal bank operated by the national government. When these funds are held at the National Bank, they are earmarked for specific financial institutions And the Andes and as needed. Although there are cases where governments change reserve requirements from time to time, these minimum amounts usually remain constant from one year to the next.

There are nations in which reserves' requirements are used as a financial tool that helps to stabilize the general economy. For example, a government central bank may move the required reserves in response to an economic situation such as recession or inflation. Before making any change in reserves, economists usually look at the most likely outcome of the implementation of the shift, both in terms of how different industries and their consumers will affect and what this step would do with the liquidity of banks operating in this nation. This means that governments tend to be slow to make any changes to the reserve requirements until it is clear that it will lead to Desired Effice.

The actual reserve requirements for the bank or financial institution will often differ on the basis of deposits held by this institution. Many nations determine a number of requirements based on what is known as the ratio reserves . This simply means that the bank must have requirements for reserves that are the least specific percentage above the total amount of transaction deposits, zero deposits and any other type of deposits that may apply.

For example, if a customer puts a total of $ 200 in a given bank (USD), this bank can extend the loan of $ 180. This simple strategy is a long way to maintain banks in all circumstances, because the institution cannot write loans for more than the total amount of funds available to this institution. This means that even if some debtors fail of these loans, the institutions are likely to remain stable and depositors may believe that their money is safe and at any time.