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. The answers can be found in your textbook or assigned reading.
2. Why does the Federal Reserve require commercial banks to have reserves? When you and other people deposit money in a bank, most of you will not demand it back anytime soon, and not all at once. However, a few of you (generally 10%) may have a reason to want it back sooner. Therefore the Fed requires your bank to set aside 10% of it's deposits, in an account at the Fed, the bank will have if and when, you demand your deposit back. The other 90% is loaned out. Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. Any money you are owed, or own is an asset. Any money you borrow, or hold that you do not own, is a liability. The commercial bank owns the money in the reserve, while the Fed owes the money to them. What are excess reserves? How do you calculate the amount of excess reserves held by a bank? The Fed requires a certain percentage of a banks deposit (usually 10%) be set aside to pay depositors who demand their deposit back. Excess reserves is money above the amount the Fed requires the bank to have on hand to pay back depositors, the bank chooses to keep on hand, rather than loan out. What is the significance of excess reserves? It reduces the liquidity (credit, or money available to borrow by small business, individuals) in the money supply, which limits growth or expansion in the private sector.