| Brief, plain explanation of bank reserves:
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| - What they are
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| Bank reserves = cash a commercial bank holds as (a) vault cash and (b) balances on deposit at the central bank. Reserves are recorded on the bank’s asset side.
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| - Types
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| - **Required reserves:** the minimum fraction of certain deposits banks must hold (set by the central bank or regulator).
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| - **Excess reserves:** any reserves above the required minimum.
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| - Why they exist
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| - Ensure banks can meet withdrawals and payment obligations.
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| - Provide a liquidity buffer and reduce the risk of bank runs.
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| - Serve as the operational base for monetary policy (central banks add or drain reserves to influence short-term interest rates and lending).
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| - How they move
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| - When customers deposit or withdraw cash, a bank’s reserves change accordingly.
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| - When banks lend, they typically create deposit balances (credit) while reserves are shifted among banks via interbank payments; total system reserves change when the central bank conducts open-market operations, discount-window lending, or pays/withdraws reserves.
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| - Monetary-policy role (mechanics)
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| - Central bank increases reserves (buys securities or lends) → banks have more capacity to lend → downward pressure on short-term rates and broader money supply.
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| - Central bank drains reserves (sells securities or absorbs via reverse repos/term deposits) → less capacity to lend → upward pressure on short-term rates.
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| - Paying interest on reserves gives the central bank a tool to influence banks’ willingness to hold excess reserves.
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| - Accounting view (simple)
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| - Bank: reserves are an asset; deposits from customers are a liability.
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| - Central bank: reserves are a liability (bank deposits at the central bank); securities the central bank holds are assets.
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| - Recent practical note (since 2020, US example)
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| - Many central banks set reserve requirements very low or zero; banks still hold reserves for liquidity and regulatory liquidity ratios. Central banks now mainly use interest on reserves, open-market operations, and reverse repos to manage policy.
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| If you want, I can show a one-line balance-sheet example illustrating a loan origination and how reserves move between banks.
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