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Bank Reserve

Bank reserves are the portion of a bank's deposits that it holds in cash or as balances with the central bank. These reserves serve as a buffer to ensure the bank can meet its obligations, including customer withdrawals and other payment demands.

What You Need To Know

Banks are required to maintain a certain level of reserves, known as the reserve requirement, which is set by the central bank of the country. The reserve requirement is typically expressed as a percentage of a bank's total deposits. For example, if the reserve requirement is 10%, a bank with $1 million in deposits must hold at least $100,000 in reserves.

Reserves can be held in the form of physical cash in the bank's vault or as deposits with the central bank. These reserves are essential for maintaining the the banking system' stability and liquidity. In times of financial stress or heightened demand for withdrawals, having sufficient reserves allows banks to continue operating smoothly without facing a cash shortage.

Central banks use changes in the reserve requirement as a tool to influence the money supply in the economy. By adjusting the reserve requirement, central banks can either increase or decrease the amount of money banks can lend out, which, in turn, affects interest rates and economic activity.