Finance, Forex and Investments

Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to?

Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held by a bank? What is the significance of excess reserves?

Public Comments

1. What you are asking would take a chapter in a text book. Here is are some brief answers to your questions. - Re: Why does the Federal Reserve require commercial banks to have reserves Reserves are a reflection on the banks solvency. If al the money was loaned and there is nothing in the vault, the bank is in trouble. - Re: Explain why reserves are an asset to commercial banks Bank Reserves to be cash in the vault (or the electronic equivelent) - Re: ...but a liability to the Federal Reserve Banks Because all FR money is collateralized; each FR note is offset by an asset, most of that is T-Bills - Re: What are excess reserves? Loanable money, - Re: How do you calculate the amount of excess reserves held by a bank? Total deposits minues minimum required reserves = Excess reserves - Re: What is the significance of excess reserves? Its a measure of solvency and represents the amount of loanable money in the system.
2. Why commercial banks are required to have reserves? It will be answered by your common sense. If you put a sum of deposit into the bank, after some time, you may withdraw the money to buy necessary things, to pay for fees and etc... So, if the banks don't have reserves, how are you going to withdraw money since banks themselves don't have money? Reserves are not only asset to commercial banks but also liability to them. There are two types of reserves - required reserves & excess reserves whereby excess reserves will be used by commercial banks to make a loan. When a loan is made, interest is eaned, money is amazingly created and total money supply will be increased. What is excess reserves actually? Excess reserves= deposits-required reserves. Based on Federal reserve requirement, commercial banks only need to put aside a sum of money or required reserves for use as we will not always withdraw money. The excess of deposits after putting aside required reserves is called excess reserves.