I was reading a bank's annual report. I discovered that the table of balance sheet contains 'reserve' in the assets column of the balance sheet. I want to know the meaning of that reserve, and its implications as an asset?
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1 Answer
In many (all?) countries banking requirements limit the amount of money the financial institution can lend. Most of the money in the checking, savings, and timed accounts is available to fund loans, which of course is the source of the income for the financial institution. Some isn't available for loans.
To make sure they have some cash reserves the government requires that some fraction of their customers deposits be deposited with the central bank. That reserve at the central bank is an asset. The customers deposits are actually a liability on the balance sheet because the bank owes it to their customers. The money that has been loaned to other customers is viewed as a asset.
answered Dec 9, 2022 at 11:29
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These reserves are the basis of fractional banking, which idiot conspiracy theorists and other wing nuts like to blame for the collapse of society, along with the Federal Reserve and Jews.– RonJohnDec 9, 2022 at 13:35
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@RonJohn tbf there is at least a possibility that forced fractional reserve banking - where you have to lend out your own money because there's no other way to get access to e.g. a credit card - causes some kind of economic distortion. Dec 9, 2022 at 18:16
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1The form that reserves take is probably deposits at the central bank, and possibly also cash. Dec 9, 2022 at 18:17
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@user253751 the comment about using credit cards and fractional reserve banking doesn’t make sense. Please clarify.– RonJohnDec 9, 2022 at 19:51
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2@user253751 No. A credit card is the best case, you can make purchases and when the statement comes, you take the cash from under your mattress, go to the bank teller or ATM and pay the bill. If you have a debit or prepaid card, then yes, the money is held at a bank prior to the purchase. Dec 9, 2022 at 23:33