Definition
Bank Reserves are the cash held by commercial banks in their vaults and the deposits they maintain at the central bank. These reserves are used to meet customer withdrawals and satisfy regulatory requirements.
Why It Matters
Maintaining adequate bank reserves ensures liquidity, financial stability, and confidence in the banking system. Insufficient reserves can increase the risk of bank runs and systemic crises, while excess reserves can limit banks' ability to lend and generate profits.
Example
A bank receives $1 million in deposits. If the central bank requires a 10% reserve ratio, the bank must keep $100,000 in its vaults or at the central bank, while it can lend out $900,000 to borrowers, generating interest income while still remaining compliant.