Bank reserves

Bank reserves are a commercial bank's cash holdings physically held by the bank, and deposits held in the bank's account with the central bank. In most countries, the central bank may set minimum reserve requirements that mandate commercial banks under their purview to hold cash or deposits at the central bank equivalent to at least a prescribed percentage of their liabilities, such as customer deposits. Such sums are usually termed required reserves, and any funds above the required amount are called excess reserves. These reserves are prescribed to ensure that, in the normal events, there is sufficient liquidity in the banking system to provide funds to bank customers wishing to withdraw cash. Even when there are no reserve requirements, banks often as a matter of prudent management hold reserves in case of unexpected events, such as unusually large net withdrawals by customers (such as before Christmas) or bank runs. Traditionally, central banks do not pay interest on reserve balances, but such schemes have become increasingly common in the 21st century. Funds in banks that are not retained as a reserve are available to be lent, at interest. In bookkeeping, reserves are ordinarily part of the shareholders equity in a company's financial statement. Bank reserves, on the other hand, are part of the bank's assets. In a bank's annual report, bank reserves are referred to as "cash and balances at central banks".