Do all banks hold reserves, and, if so, where do they hold them?
All depository institutions (commercial banks, savings institutions,
credit unions, and foreign banking entities) are required to hold reserves
against certain types of deposits that they report as liabilities on their
balance sheets. The function of reserve requirements is described in the
Federal Reserve publication, Purposes and Functions:
At present, reserve requirements aid in the conduct of open market operations
by helping to ensure a stable, predictable demand for reserves; they thereby
increase the Federal Reserve's control over short-term interest rates.
In what forms may depository institutions hold their reserves?
Depository institutions may hold their required reserves as:
- Vault cash
- Deposits at their regional Federal Reserve Bank
Depository institutions normally keep a certain level of vault cash on
hand to meet the operating needs of their offices and branches. Required
reserves above the amount of vault cash are met by holding reserve balances
with Federal Reserve Banks. Most institutions hold their reserves directly
with their Federal Reserve Bank.
Depository institutions prefer to minimize the amount of reserves they
hold, because neither vault cash nor Reserves at the Fed generate interest
income for the institution.
How large are total reserve requirements for all depository institutions?
As of November 2001, aggregate required reserves of depository institutions
were $39.1 billion, according to the Federal Reserve Board's H.3 Statistical
cash used to satisfy required reserves was $31.2 billion; reserve balances
with Federal Reserve Banks were $8.9 billion.
What are 2001 reserve requirements against deposits?
Effective December 28, 2000, depository institutions were required to
hold a reserve requirement of 3 percent against their first $42.8 million
in net transaction accounts (demand and other checkable deposits). They
were required to hold a 10 percent reserve against their net transaction
accounts above $42.8 million. At present, there is no reserve requirement
on time and savings deposits.