What Is a Reserve Fund?

Reserves are a provision in the project plan to mitigate cost and schedule risks. Reserve funds are funds established to meet future repurchase, redemption of capital debts, or to prevent accidental losses, including loan and securities loss reserves and sinking funds.

Reserve

The English name is: reserve

Modifiers commonly used in this term further specify what type of risk is to be mitigated. However, the specific meaning of these modified ingredients varies depending on the application field. For example, management reserves, emergency reserves and so on.

China's

The deposit reserve refers to the deposits with the central bank that are prepared by financial institutions to ensure that clients can withdraw deposits and clear funds. The ratio of the deposit reserve required by the central bank to its total deposits is

The two methods of raising interest rates and raising the reserve ratio are to increase the cost of borrowing for enterprises. For banks: 1. Raise interest rates. The cost of capital has been increased, and the demand for funds has been reduced, so that the bank's capital supply will be relatively increased. Have an impact on the development of banking business. 2. Increase the bank reserve ratio. What you say should say

Reasons to increase reserve ratio

1. The excessive growth of the total amount of money and credit is the direct reason for increasing the reserve ratio. The main reason for the central bank to raise the statutory deposit reserve ratio was the rapid growth of money and credit. At the end of June 2003, the broad money M2 balance was 20.5 trillion yuan, a year-on-year increase of 20.8%. In June of the same year, loans increased by 525 billion yuan, a record high for monthly loans. The increase in loans in July increased by 71% over the same period of the previous year, and still maintained a rapid growth trend. In the first seven months of 2003, RMB loans of financial institutions increased by 1,87872 billion yuan, which exceeded the level of 1,757.5 billion yuan of loans last year. Since the first quarter, the central bank has warned of the excessive growth of money and credit and issued a policy signal to adjust the legal reserve ratio in mid-June. What the central bank is worried about is that the excessive growth of loans will promote the low-level expansion of the economy and affect the sustainable and healthy development of the economy. There are two main reasons for the rapid growth of money and credit: First, it is related to the rapid increase in base money and bank reserves caused by the influx of foreign capital. Before 2001, there had been a large amount of capital flight on China's balance of payments. The reason why it is called flight is because the outflow of these funds is difficult for the government to control and monitor, but it is reflected in the statements as an aftermath. Observing China's balance of payments account from 1994 to 2002, it can be found that the accumulated current account surplus was US $ 202.6 billion, the accumulated capital account surplus was US $ 174 billion, and the accumulated errors and omissions were US $ -107.8 billion. Regarding negative errors and omissions, it is generally believed that the vast majority of the project is a capital flight that is difficult to count and monitor. If this judgment holds, then the situation in 2002 is particularly noteworthy. The annual error and omission of $ 7.8 billion was positive, which seems to indicate a difficult capital inflow. Judging from the continued increase in foreign exchange reserves in the first half of 2003, international capital continues to enter China in a manner that is difficult for the Chinese government to monitor. There are two explanations for this: first, in the context of the international economic downturn, China's strong economic growth has attracted international capital; and second, the expectation of the appreciation of the renminbi has caused a lot of hot money to enter China. Second, it is related to the rapid growth of the real economy. According to the "Industrial Economics Prosperity Index" of the Development Research Center of the State Council, since the beginning of 2003, China's industrial production has entered a new growth channel, and the prosperity index has continued to climb at the highest level since 1998. The upward momentum in May and February has slowed down, but judging from the situation in June, its development trend has not changed fundamentally and is gradually returning to its original growth trajectory. In the first half of 2003, 3 of the 25 major industrial industries were above a good economic level (the growth prosperity index was greater than 130), while only 1 industry had an average economic level above a good level in 2002; there were 15 Each industry is above a good economic level (the growth prosperity index is greater than 110 and less than 130), and the corresponding number in 2002 is 11; the number of industries with moderate and poor prosperity (the growth prosperity index is less than 110) is 15 from 2002 Down to 7. Since 2002, driven by market demand, industries such as steel, building materials, non-ferrous metals, automobiles, and textiles have grown rapidly. However, due to the irregular competition order, the survival of the fittest mechanism cannot be effectively used. These industries have disorderly competition, blind investment, low The phenomenon of repeated horizontal construction is very serious. In short, the rapid growth of the real economy has not only driven the growth of money and credit, but also attracted a large amount of international capital. Coupled with expectations of RMB appreciation, international capital is flowing into China mysteriously and continuously, making it difficult for the central bank to control currency and credit. Further increase. 2. Relying solely on open market operation methods can not achieve the purpose of financial regulation. As mentioned earlier, since 2003, the good operation of the domestic macro economy has suddenly increased the huge impulse of commercial bank credit expansion, and the strong expectations of RMB appreciation internationally have also caused a sharp rise in foreign capital inflows. This makes it more difficult for the central bank to control monetary credit. The People's Bank of China operates only through open markets, and its power is no longer sufficient to control the placement of base currencies. For example, withdrawing the base currency invested due to foreign exchange funds, despite the increasing scale of issuing central bank bills, I still feel powerless. Regarding the expansion of the commercial bank's credit scale, although a window guidance was conducted in June, requiring commercial banks to pay attention to risks, the data thereafter have shown no effect. It can be seen that in this case, the open market operation or window guidance alone has a limited effect. It must have more effective policy means. This is to increase the deposit reserve ratio.

Reserve Impact Analysis

1. The impact on the total amount of money and credit is rejected. The balance of deposit reserve of financial institutions is 1.6 trillion yuan. An increase of 1 percentage point in the reserve requirement ratio will generally freeze the excess reserve of 150 billion yuan in commercial banks, which is a mild one. Policy measures. A slight increase in the deposit reserve ratio will appropriately affect the expansion multiplier of the base currency, but will not cause currency credit to decline. After raising the deposit reserve ratio, commercial banks will still maintain a certain level of liquidity and still have the ability to increase loans steadily. Since 1998, the inter-bank bond market has developed significantly. At present, financial institutions hold more than 200 billion yuan of highly liquid government bonds, financial bonds and other bonds, and they also hold more than 400 billion yuan of central bank bills. In the process of raising the deposit reserve ratio this time, commercial banks with liquidity difficulties may apply to the People's Bank of China for early redemption of central bank bills they hold or sell bonds in accordance with relevant regulations to cover deposit reserves. At the same time, the People's Bank of China will make appropriate arrangements to increase re-loans and re-discounts in accordance with actual and reasonable needs to maintain stable growth of money and credit. Therefore, raising the deposit reserve ratio will not cause a decline in the total amount of money and credit, and money and credit will continue to grow steadily. In addition, the People's Bank of China will continue to urge commercial banks and other financial institutions to improve financial services to ensure that the reasonable funding needs of enterprises and residents in line with national industrial policy guidance are met. Increasing the deposit reserve ratio has no impact on the economic activities of enterprises and residents. 2. Impact on funding conditions Financial indicators in October showed that the broad currency M2 grew by 21%, financial institutions' domestic and foreign currency loans increased by 23.6%, and the base currency grew by 19.7%. The reserve ratio reflecting the financial positions of commercial banks' financial institutions rose to 4.11%, a 0.6 percentage point increase from the end of last month, and the country's foreign exchange reserves continued to grow rapidly. Judging from these indicators, the national economy is growing at a high speed, prices are rising, and funds reflected by a series of indicators such as currency and credit are not tight. 3. Impact on commercial banks: First, it affects the profit level of commercial banks. For commercial banks, an increase in the reserve requirement ratio means that the bank increases the amount of reserves deposited with the central bank, which will directly lead to a reduction in the funds it can use to issue loans. Because commercial banks have the function of creating credit, the actual amount of funds that commercial banks can reduce to create profits will be multiplied by the amount of reserves. At present, judging from the operating methods and profitability of China's commercial banks, the main source of profits is still to earn interest income by issuing loans. The statutory deposit reserve interest rate of commercial banks is 1.89%, while the reloan interest rate of the People's Bank of China is 3.24%, the annual interest rate of central bank bills is approximately 2.30%, and the one-year interest rate of loans is 5.31%. The interest rate difference between these three items and the reserve interest rate are: 1.35 0.41; 3.31. Then, if the current size of deposits and loans is calculated: Assume an increase of 1 percentage point in reserve deposits and freeze the 150 billion yuan of funds available to commercial banks. Therefore, the interest income from reducing the loan is 3.31% * 1500 = 4.965 billion yuan. At the same time, the comprehensive financing cost of deposits by commercial banks is greater than 2.0%, and the deposit reserve interest rate of 1.89% on banks also needs to discount some interest expenses, and subsidy interest margin expenditures amount to 200 million yuan. Therefore, this item alone will affect the profit of commercial banks by more than 5 billion yuan. Second, promote commercial banks to improve their capital management. The proportion of available funds in the newly-added deposits of commercial banks is 1 percentage point lower than the original. Under the self-restraint management system where capital sources restrict the use of funds, commercial banks are encouraged to pay more attention to deposits in order to further strengthen their capital strength. On the one hand, commercial banks must pay more deposit reserves, on the other hand, they must borrow re-loans from the central bank or repurchase central bank bills to make up for the gap in credit funds, increasing the interest expenses on re-loans or bills. From the perspective of liquidity, state-owned commercial banks have sufficient liquidity and strong ability to absorb liquidity. State-owned commercial banks are the main holders of government bonds, policy financial bonds, and central bank bills. Purchasing can meet the liquidity needs in a timely manner. In the end, when problems cannot be solved, refinancing can be obtained from the central bank. Therefore, the increase in the reserve ratio objectively promotes commercial banks to be more flexible in using various funds utilization channels, improve the efficiency of fund allocation and use, and promote the improvement of the management level of funds. Third, promote commercial banks to optimize asset structure and effectively reduce non-performing loans. According to the money multiplier theory, the money supply is the product of the base currency and the money multiplier, and the statutory deposit reserve ratio is one of the important factors that determine the size of the multiplier and thus the ability of the subsistence funds to multiply. The elasticity coefficient of the deposit reserve ratio is very large, and small changes in the reserve ratio will cause a large increase or decrease in the money supply. The creation of money and credit by commercial banks is mainly based on the issuance of loans. This policy adjustment will allow commercial banks to issue loans more cautiously and operate more prudently in the inter-bank lending market, first ensuring their own liquidity needs. As the division of labor in China's commercial banks becomes more and more blurred, the demand for funds becomes more and more convergent. When a commercial bank's funds become tight, other commercial banks also become tighter. Therefore, the liquidity of the whole society is tightened, and as a result, commercial banks will be more cautious in issuing loans in the following months, which will lead to a significant decline in loan growth. At the same time, the sale of bonds by some banks will also change the existing asset structure of commercial banks. In the long run, there will be less new loans, more prudent loan investment, and new non-performing loans will also decrease. 4. Impact on the securities market The increase in the deposit reserve ratio has an indirect impact on the stock market, but the negative impact on the bond market is quite direct and long-term. Among the three major monetary policy tools, the adjustment of the deposit reserve ratio is the most powerful medicine. It will also have side effects while quickly calming the excessive growth of the currency. The increase in the deposit reserve ratio will make the interest rate of the society High expectations have led to higher interest rates in the inter-bank lending market; tighter liquidity of commercial banks will prompt them to appropriately increase the rise in short-term interest rates on loans, which will inevitably increase the borrower's cost of borrowing. Because of this, all varieties of the securities market reacted immediately after the announcement of an increase in the reserve requirement ratio. In addition, the impact on securities companies is even more obvious. The original stocks of securities investment funds have fallen and capital losses have been formed. Now the decline in government bonds and corporate bonds has further worsened securities institutions. The increase in the deposit reserve ratio will inevitably make the funds of these institutions more tight, and therefore pose a systemic risk to the securities market. Among them, the impact on the stock market is relatively indirect, but the stock ratings of some industries will be adjusted; the negative impact on the bond market is quite direct and long-term. 5. Impact on the performance of listed banks The increase in the reserve ratio has a greater impact on individual banks with higher ratios of non-performing assets, and for most banks, because they still have some highly liquid assets in their hands, they can be realized at any time. Therefore, raising one point to reduce the position of commercial banks by 150 billion yuan will not have a great impact. Generally speaking, the annual increase in the legal reserve ratio by one percentage point has an impact of 1 cent on the earnings per share of listed banks. In addition to the time when the policy was introduced, more than half of it has passed in 2003. This effect will Further shrinking. Below we make further analysis through the data of two listed banks. (1) At the end of 2002, China Merchants Bank had a deposit balance of 300.4 billion yuan, which was close to 370 billion yuan at the end of 2003, with an annual average of about 335 billion yuan. In order to simplify the processing, it is assumed that China Merchants Bank increased the statutory reserve by the average deposit in 2003. Due to the 1% increase in the statutory reserve ratio, this means that China Merchants Bank must deposit another 3.35 billion yuan (3350 * 1%) of funds in the Central Bank. Assume that after increasing the statutory reserve deposits, high-yield loans are reduced by the same amount. In 2002, the average loan interest rate of China Merchants Bank was 4.80%, the average deposit interest rate was 1.21%, and the deposit-loan gap was 3.59%. On this basis, if it is not to increase the statutory reserve, the average pre-tax profit (total profit) brought by the normal loans of 3.35 billion yuan will be about 120 million yuan, or about 80 million yuan in net profit. As the current statutory reserve deposit interest rate is 1.89%, after the statutory reserve ratio is increased by 1 percentage point, China Merchants Bank's increased statutory deposit reserve of 3.35 billion yuan will receive approximately 63 million yuan of interest income. Combining the above two aspects, its annual pre-tax profit decreased by about 60 million yuan (12,000-6300). The current total share capital of China Merchants Bank is 57.681 million shares. After deducting income tax, the increase in the statutory reserve ratio will not affect the earnings per share of China Merchants Bank by more than 1 cent. Therefore, the adjustment of the statutory reserve ratio had little impact on the bank's 2003 earnings per share. [Note: Earnings per share = net profit weighted average number of ordinary shares issued by preferred stock dividends. This indicator reflects the level of profit of ordinary shares. The higher the ratio, the stronger the ability to earn per share] (2) Minsheng Bank Minsheng Bank The balance of deposits at the end of 2002 was 184.7 billion yuan, and the balance of deposits at the end of 2003 would exceed 290 billion yuan, with an annual average of about 240 billion yuan. In 2002, the average deposit interest rate of Minsheng Bank was 1.71%, and the average loan interest rate was 5.64%. According to the same method as above, after the legal reserve ratio was increased by 1 percentage point, the annual profit before tax of Minsheng Bank decreased by about 40 million yuan. At present, the total share capital of Minsheng Bank is 3.36274 million shares. Regardless of the factor of Minsheng Convertible Bonds into Shares, the impact of the adjustment of the statutory reserve ratio on Minsheng Bank's earnings per share will not exceed 1 cent. This is also true of several other listed banks (such as SDB, SPDB, Huaxia Bank).

Development trend of reserves

Foreign central banks usually do not pay interest rates for reserves, and it is the general trend that the People's Bank of China will lower the interest rates on reserves. However, the reduction of the reserve interest rate may bring about macroeconomic overheating. Therefore, it is a good pavement to increase the reserve ratio in advance to prevent the economy from overheating. At the forum of the presidents of the People s Bank of China on October 20, 2003, Governor Zhou Xiaochuan continued to emphasize the need to maintain modest growth in loans and money supply. At present, the market expects that the reserve ratio will be raised twice. In other words, if the central bank continues to implement a monetary policy that focuses on the money supply, then as the macroeconomic situation continues to heat up, in the future, if the money supply has not been suppressed, then the statutory deposit reserve ratio may increase again. Quite high. At the same time, some experts pointed out that the method of raising interest rates can be used to attract currency to withdraw. However, some people think that the probability that the central bank will increase the bank deposit reserve again is far greater than the increase in bank interest rates, because the increase in interest rates will only make the expectations of RMB appreciation stronger, and the problem of RMB foreign exchange accounting is still serious. Overseas "hot money" provides greater arbitrage. On the other hand, the current rise in the prices of means of production, especially in some "heavy-head" industries such as steel and non-ferrous metals, has clearly started to have a backlog on their final demand side, such as the housing and automotive products markets. The "investment boom" has not been accompanied by a strong consumption boom. With the stability of the consumer price index and the industrial product market price index, corporate profit margins are facing a direct challenge, and rising interest rates will lead to more negative factors. In fact, the decisive factor for whether the deposit reserve ratio has been raised for the second time is: How does the decision-making department judge whether the overall economy is overheating? Many scholars have different opinions on this. Drawing on the experience of countries around the world, when formulating monetary policies, factors such as exchange rates, inflation rates, and money supply should be comprehensively measured. Each has its own weight, and we cannot just focus on the money supply. The "Decision of the Central Committee of the Communist Party of China on Several Issues Concerning the Improvement of the Socialist Market Economy System" reviewed and approved at the Third Plenary Session of the 16th CPC Central Committee re-positioned monetary and fiscal policies in improving the country's macro-control system. The important changes in monetary policy are that promoting economic growth is no longer the main goal, and the goal will be adjusted to maintain currency stability, with the focus on maintaining overall balance; maintaining the overall stability of financial operations and financial markets; and preventing systemic risks. Fiscal policy is responsible for the functions of promoting economic growth, optimizing product structure, and preventing financial risks. It can be seen that a country's economic regulation will depend more on fiscal policy.