Required Reserves
Required reserves are funds that banks and other financial institutions are legally obligated to keep on hand in order to meet their obligations to customers and other creditors. These reserves are typically held in the form of cash, government securities, or deposits with the central bank. The amount of required reserves is determined by the central bank and is based on the size and type of the institution’s liabilities.
History of Required Reserves
The concept of required reserves has been around since the early days of banking. In the United States, the Federal Reserve System was established in 1913 and was given the authority to set reserve requirements for banks. The Federal Reserve has the power to adjust these requirements in order to influence the money supply and the economy. In recent years, the Federal Reserve has used this power to reduce reserve requirements in order to stimulate economic growth.
Comparison of Reserve Requirements
| Type of Institution | Reserve Requirement (%) |
|---|---|
| Commercial Banks | 10 |
| Savings and Loan Associations | 3 |
| Credit Unions | 3 |
Summary
Required reserves are funds that banks and other financial institutions are legally obligated to keep on hand in order to meet their obligations to customers and other creditors. The amount of required reserves is determined by the central bank and is based on the size and type of the institution’s liabilities. For more information on required reserves, please visit the Federal Reserve’s website or consult a financial advisor.
See Also
- Reserve Ratio
- Excess Reserves
- Money Supply
- Federal Reserve System
- Monetary Policy
- Interest Rates
- Banking Regulations
- Liquidity
- Capital Requirements
- Financial Stability
