What is a legal reserve?

The statutory reserve is the amount of cash that a financial institution, such as a bank, a credit union or insurance company, must be at hand to fulfill the obligations arising from receiving deposits and premium payments. The statutory reserves required by banks and credit unions are generally determined by the Central Bank of the Nation and those required from insurance companies are laid down by the law or regulation of the national, state or provincial government or regulatory authority. Calculated in different ways, statutory reserves are required to ensure that financial institutions are able to pay demands in the disastrous situation. Other financial institutions, such as brokerage pages, will achieve their profits by billing commissions of their clients at each transaction and generally do not have access to their cfinance resources for lending or investing, and therefore usually not subject to reserve requirements.

Banks, CooperativeBack units and insurance companies must then achieve a balance between their obligations towards their shareholders to maximize profits by investing and lending their assets - deposits and premiums they have accepted - and their obligation to their deposers and clients maintain sufficient liquidity to arise. In the United States, the determination of the legal requirements for banks shall be carried out by the Federal Reserve Bank; The National Credit Union (NCUA) Association sets for national rented credit unions. In general, the statutory reserve requirement for banks and credit unions in the United States is 10% of deposits; This means that if the bank has $ 100,000,000 in the US (USD) in customers, it can borrow $ 90.0 $ 90,000 and have to keep $ 10,000,000 either in cash in its own safe or on the Federal Bank or other member bank.

Not only does the reserve requirement solve liquidity problems and increases the perception of stability for the banking industryIn the country, but it can also have a moderating effect on the national economy. If the reserve requirement is increased, the amount of money available for lending will automatically decrease and slowly slows down economic activity. Likewise, reducing the reserve request can potentially increase the amount of money available for lending. While the requirements for reserve remain relatively stable in most countries, some nations, including the United Kingdom, Germany, Turkey and the United States, have reduced their reserve requirements in the second half of the 20th century, in some cases dramatically.

, on the other hand, the calculations of legal reserves for insurance companies in the United States are very complex and are a basid of every insurance contract issued by a company. The requirements are determined by every state in which the company is doing business. The most commonly used formula for setting up a reserve is the reserve reserve valuation method, a complex formula based on a number of factors, including the age and gender of the policyholder, the type of valid policy and the tableMortality used to calculate current policy values. Thus, when meeting its legal requirements for the reserve, the insurance company must use the values ​​derived from the complex formula used for each policy issued in the state and cancel the liquid reserve for the amount of reserves required for all policies. It must do this for every state in which it does business and regularly confirms for each state that the reserves it maintains meets the legal requirement.