Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to? and World Bank Group President Jim Yong Kim addresses guests at a luncheon hosted by the Korea chamber of Commerce and Industry

Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to?

Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held by a bank? What is the significance of excess reserves?


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Answer by Aimee Thomas
Why commercial banks are required to have reserves?

It will be answered by your common sense. If you put a sum of deposit into the bank, after some time, you may withdraw the money to buy necessary things, to pay for fees and etc...

So, if the banks don't have reserves, how are you going to withdraw money since banks themselves don't have money?



Reserves are not only asset to commercial banks but also liability to them. There are two types of reserves - required reserves & excess reserves whereby excess reserves will be used by commercial banks to make a loan. When a loan is made, interest is eaned, money is amazingly created and total money supply will be increased.



What is excess reserves actually?

Excess reserves= deposits-required reserves.

Based on Federal reserve requirement, commercial banks only need to put aside a sum of money or required reserves for use as we will not always withdraw money. The excess of deposits after putting aside required reserves is called excess reserves.

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World Bank Group President Jim Yong Kim addresses guests at a luncheon hosted by the Korea chamber of Commerce and Industry


Image by World Bank Photo Collection
December 3, 2013 - Seoul Korea. World Bank Group President Jim Kim spoke on investment opportunities for Korean companies in Africa at a luncheon hosted by the Korea chamber of Commerce and Industry, in Seoul, Korea. Photo: Young-Jin Yoo / World Bank

Photo ID: JYK_WBG_Korean_chamber of commerce luncheon1

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