Chapter 6 The Monetary System

LECTURE VIDEO学习视频6:

Bank Reserves

Reserves(R) refer to the deposits that banks have received but have not loaned out. The bank has to keep some reserves so that the cash is available if depositors want to make withdrawls.

Reserve ratio is the fraction of deposits that banks hold as reserves. (r=R/D)

While, the commercial bank holds reserves in accounts with the central bank.

The reserve ratio is determined by government regulation and bank policy.

To eliminate the possibility that commercial banks agressively loan out 100% of deposits and thereby cannot meet depositors' withdrawl demand anytime anywhere, the central bank sets reserve requirement to protect depositors. 

The central bank usually set the required reserve ratio to regulate the minimum amount of reserves that banks keep. 

Required reserve ratio(rr) is the minimum percentage of total deposits as reserves that banks must hold.

For any bank, the amount of required reserves equals to the required ratio times its total deposits. (RR=rr*D)

In fact, commercial banks may hold reserves above the legal minimum, thus those banks who hold excess reserves can be more confident that they will not run short of cash.

Excess reserves (ER)=Total reserves(R)- required reserves(RR)

Deposits are liabilities for the bank because they represent the depositors' claims on the bank.  

Loans are an asset for the bank because they represent the banks' claims on its borrowers.  

Reserves are an asset because they are funds available to the bank.