Tuesday, May 19, 2009

Primary Bank Reserves

Primary Bank Reserves are simply cash held by the bank, whether in its vaults or in deposits of other banks. The Federal Reserve System, however, does not permit its member banks to include in their legal reserves interbank deposit in other commercial banks, though it does include deposits in regional Reserve Banks. Nevertheless, for many purposes, other than meeting legal reserve requirements, deposits in other banks meet all the requirements of ready cash.
The amount of primary, or cash, reserve available to a given bank depends upon two major factors; (1)deposits flows in or out of the bank, and (2) the prevailing Federal Reserve policy, including changes in such policy. The federal Reserve, of course, has ultimate control over the amount of bank reserves available to the banking system. in addition to the amount of cash reserves available, the primary reserve position of the bank or the entire banking system also depends upon the amounts of reserve that are required. These required reserves depend not only upon the amount of bank deposits but also on their distribution between time and demand deposits. Legal reserve requirements also affect the amount of required reserves.
MEMBER BANK RESERVE REQUIREMENTS in 1935 congress gave the Board of Governors of federal Reserve System the power to impose reserve requirements on both demand and time deposits within a certain range on each set by Congress. At that time legal reserves of member banks were defined as being only deposits in the federal Reserve Banks. In 1959 Congress again amended the basic Federal Reserve Act in order to permit vault cash as well as deposits in federal reserve banks to be included in legal reserves.
LAGGED RESERVE ACCOUNTING The required reserve base for all member banks is computed against average daily deposits for the weekly reserve period, which runs from Thursday to Wednesday inclusive. In 1968 the federal Reserve introduced lagged reserve accounting, so that required reserves for the current reserves week are now based on average deposits in the period two weeks earlier. furthermore, member banks are permitted to carry forward into the next reserve week either excess or deficiencies averaging up to 2 per cent of required reserves.

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