ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -What Are Bank Reserves? Bank reserves are the cash minimums that financial institutions must have on hand in order to meet central bank requirements. This is real paper money that must be kept by the bank in a vault on-site or held in its account at the central bank.

Detailed explanation-2: -Reserves are the amount of money that banks keep in vaults, and they are a fraction of all deposits made. In most countries, banks are heavily regulated and are required to keep a minimum percentage of all deposits, just in case someone wants to withdraw some money. This minimum percent is the reserve requirement.

Detailed explanation-3: -The Federal Reserve tells depository institutions the minimum amount of money they must keep available for financial obligations. This minimum is known as the reserve requirement. Any money banks keep over this limit is considered excess reserves.

Detailed explanation-4: -This amount is called the reserve requirement, and it is the rate that banks must keep in reserve and are not allowed to lend. The Federal Reserve’s Board of Governors sets the requirement as well as the interest rate banks get paid on excess reserves.

Detailed explanation-5: -Excess reserves are funds that a bank keeps back beyond what is required by regulation. As of 2008, the Federal Reserve pays banks an interest rate on these excess reserves.