Bank Reserve

What is Bank Reserve? 

Loans are usually given after a corresponding or overly compensating value of the collateral has been signed in. In like terms, bank reserve refers to the bulk of currency/limit of currency a lending institution or a central bank holds in reservation to back up its standing requirement against significant withdrawals or any other adverse conditions.

This amount of money is kept in liquid accounts and safeguarded usually in vaults in various banks. The amount required for each bank to hold in reserve is always determined by the central or Federal bank of the Nation. A central bank will require this minimum reserve before allowing banks to borrow from its holdings.

Reserves and types

Bank reserves can be classified into two:

• Required reserve: is the minimum amount required on hand by banks  

• Excess reserve: is the additional amount of liquid cash to required reserve that a bank does not loan out or expend.

Why Bank Reserves?

Bank reserves have proven instrumental in financial management policies of financial institutions and their consumer.

Reserves tasks banks with the responsibility to hold a certain amount of cash so that they never run short and have to refuse customer's withdrawal, possibly triggering a bank run – which describes the simultaneous withdrawal of deposit by customers over the institution’s viability concerns.  

It is often relied upon as a lifesaver for banks which could have suffered the inability to remain in solvency - this occurs when a banking institution loses the ability to pay off its debts and fulfill other financial obligations.