Bank Reserves Role

A minimum level of reserves was once considered necessary to ensure that the bank could meet deposit withdrawals. However, experience has shown that well-managed monetary system can function properly without reserve requirements. Some examples are the United Kingdom, Canada, Australia and Sweden. A fair question, what are the requirements for it, in fact, the U.S. system.

There is sufficient availability of credit suggest

Reserves include amounts deposited on the bottom most of the Federal Reserve Treasury. A bank can not hold sufficient reserves and breaks down again, if the total assets, including loans and securities, do not cover their obligations. However, a good bank can always borrow the money market or the Fed to meet reserve.

Measure the solvency capital of the activities of a bank is, the less its liabilities. Federal Reserve imposed a lower limit for the bank's capital relative to risk-weighted assets to leave a margin in case of insolvency. This relationship is ultimately what limits the creation of a bank deposit through loans.


The main function of the reserves

Even in the absence of reserve requirements, banks still have sufficient reserves to maintain the Fed to cover checks written by their depositors, and the money available to meet the demand for money. The Fed and other clearing banks generally require the payment of foreign currency will have no credit risk, rather than direct transfers between private banks to make credit risk.

Other useful features

Average reserves can provide a useful protection against disorders of the money market. For example, if there was an unexpected drop in inventories at the beginning of the creation of a bank, the bank may allow its reserves below the amount needed temporarily. Later, it could contain excess levels sufficient to restore the necessary means.

In the long term, the reserve requirement may also influence the amount of bank lending rates and deposit the amount of credit and deposits. The main issues to be addressed are: what is the level of reserve requirements, if they are paid (recovery of interest), and may cover a period of days.


The trend toward zero reserves

Reservations are not paid a tax on banks implied, but end up paying customers. The interest rate charged by a bank for loans should reflect costs.

United States, the required reserve ratio is 10%, no interest is paid on balances of reserves and the calculation period for calculating the reserves for 14 days. These rules are far from typical of central banks. In fact, the trend among major industrialized countries was zero reserve system.


A system of zero reserve

For example, Canada does not impose minimum reserves on its shores. central bank, the Bank of Canada (BOC), ready for a free night at the discount rate to ensure that the payment orders between banks will be deleted. This establishes a ceiling for overnight rates. It also pays interest on balances that banks hold at the BOC one percentage point below the discount rate of 0.5. This puts a floor on the percentages of the night. The money market rate volatility is limited to this area.

BOC rate target is the center of the field. To drive the overnight rate to achieve the objective, the market opened BOC similar to those used by the Federal Reserve. To compensate for variations in settlement of balances resulting from the inputs and outputs of the federal government on a daily basis BOC offers to purchase or sale of another government, the Bank of China at an auction in a closed group of representatives of the securities.

The dollar is a special case?

The United States would be better served by a system of reserves equal to zero is not a simple question. An obvious advantage would be the elimination of tax on U.S. banks. This will improve its competitive position in the world. But the dollar's role as world reserve currency should be considered a priority. The high overall level of transactions in U.S. dollars, without a sufficient cushion intervention and the size of those found in the Fed funds could cause serious problems.

Government spending and money supply

According to conventional wisdom, the federal government spends taxpayers' money. In fact, it creates all the money spent, and continues with the fees and sales of securities. In the long run, however, must spend at least how it goes. Otherwise, it would clearly support the claim monetary base money, which is the main part of the money, in which the economy works. To influence the amount of money credit issued by banks, the government should check the cost for banks to obtain the monetary base.

Management of the supply of base money

The Treasury pays the bills on behalf of the Government of the Federal Reserve These payments will inject new reserves of base money in the banking system. Since the increase in stocks may hamper the ability of the Fed to implement monetary policy, the Ministry of Finance as follows:

1. That the government spends to rebuild Fed with regard to transfers from the equality of commercial bank deposit accounts where the revenue from taxes and sales of securities. This eliminates the stock of base money created by its costs. total reserves of the banking system are the same, on average, allowing the Fed to make small changes to the reserves necessary to maintain control of the federal funds rate.
2. The Treasury fills their bank accounts in commercial revenue from taxes and selling bonds when there is a reduction in tax revenue. If tax revenues exceed the costs, the excess of net redemptions of securities. In this way, minimizes the interruption of all bank deposits in the private sector.

Balanced mutual funds flow

In fact, the Treasury recycles money base created by the Fed last year. entrances and exits to move bank deposits and reserves in the banking system without changing the overall average. The Treasury does not need others in their bank account, beyond what is necessary to cover payments in the short term. Normally it takes the value of public spending nearly a month, now average about $ 300 billion.

The increase in long-term supply of public money because of (1) net borrowing from banks and (2) the growing demand for the currency. The money supply growth, the Fed injected reserves into the banking system for the balance of supply over demand for direct federal funds rate, the main instrument of monetary policy. This is accomplished with the purchase of government bonds held by the public.

Because the government can always sell the securities

Until the federal government strengthens tax collection, the base currency will be in demand. Since the base currency earns no interest, when the private sector has more of what everyone wants to take the only alternative is the net interest on Treasury bills. The Ministry of Finance may pay this interest to market demands, then there will always be buyers of securities.