Defining “Reserves”
Angry Bear
I’ve run into quite a bit of confusion in conversations discussing bank reserves, and found occasion to get precise on the usage in recent comments. I thought I’d share it with others. This has been vetted by several who are more worthy than I, so I feel quite confident in offering it up.
1. “Reserve balances.” These are banks’ deposits at the Fed. Similar to your credit balance in your checking account (except in “bank money”). They’re liabilities of the Fed, assets of the banks. They appear and are identified as such on banks’ (and the Fed’s) balance sheets.
2. “Required reserves.” A regulatory amount (percentage of deposits) that banks are required to hold in specified “safe” assets — significant examples being treasuries, vault cash, gold (in their vaults or the Fed’s), and…reserve balances. The term “required reserves” does not appear on banks’ balance sheets.
3. “Excess reserve( balance)s.” I add “balances” because this explicitly refers to that particular type of holdings — deposits at the Fed. A bank could (in theory) have sufficient required reserves held in treasuries and vault cash, so all of its reserve balances could be “excess reserves.” (Depending on which of the bank’s assets you might want to point to and arbitrarily call its “required reserves.” That thing is a regulatory (pro)portion, not a specific set of financial assets, or a balance-sheet entry.)
What’s funny here: Excess Reserves are explicitly not reserves in the sense of “funds that are required to be ring-fenced under law so depositors can withdraw their money or transactions can clear.” By definition, they’re the banks’ deposits at the Fed that are not ring-fenced.
So excess reserves are not actually “reserves.” No wonder people get confused.
Takeaway:
Required reserves aren’t necessarily held in the form of reserve balances.
Reserve balances are not necessarily required reserves.
(Which is why I would prefer a better term than “reserve balances.” Fed deposits?)
I’ve run into quite a bit of confusion in conversations discussing bank reserves, and found occasion to get precise on the usage in recent comments. I thought I’d share it with others. This has been vetted by several who are more worthy than I, so I feel quite confident in offering it up.
1. “Reserve balances.” These are banks’ deposits at the Fed. Similar to your credit balance in your checking account (except in “bank money”). They’re liabilities of the Fed, assets of the banks. They appear and are identified as such on banks’ (and the Fed’s) balance sheets.
2. “Required reserves.” A regulatory amount (percentage of deposits) that banks are required to hold in specified “safe” assets — significant examples being treasuries, vault cash, gold (in their vaults or the Fed’s), and…reserve balances. The term “required reserves” does not appear on banks’ balance sheets.
3. “Excess reserve( balance)s.” I add “balances” because this explicitly refers to that particular type of holdings — deposits at the Fed. A bank could (in theory) have sufficient required reserves held in treasuries and vault cash, so all of its reserve balances could be “excess reserves.” (Depending on which of the bank’s assets you might want to point to and arbitrarily call its “required reserves.” That thing is a regulatory (pro)portion, not a specific set of financial assets, or a balance-sheet entry.)
What’s funny here: Excess Reserves are explicitly not reserves in the sense of “funds that are required to be ring-fenced under law so depositors can withdraw their money or transactions can clear.” By definition, they’re the banks’ deposits at the Fed that are not ring-fenced.
So excess reserves are not actually “reserves.” No wonder people get confused.
Takeaway:
Required reserves aren’t necessarily held in the form of reserve balances.
Reserve balances are not necessarily required reserves.
(Which is why I would prefer a better term than “reserve balances.” Fed deposits?)
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