Defining “Reserves”

June 12th, 2013

I’ve run into quite a bit of confusion in conversations discussing bank reserves, and found occasion to get precise on the usage in recent comments. I thought I’d share it with others. This has been vetted by several who are more worthy than I, so I feel quite confident in offering it up.

1. “Reserve balances.” These are banks’ deposits at the Fed. Similar to your credit balance in your checking account (except in “bank money”). They’re liabilities of the Fed, assets of the banks. They appear and are identified as such on banks’ (and the Fed’s) balance sheets.

2. “Required reserves.” A regulatory amount (percentage of deposits) that banks are required to hold in specified “safe” assets — significant examples being treasuries, vault cash, gold (in their vaults or the Fed’s), and…reserve balances. The term “required reserves” does not appear on banks’ balance sheets.

3. “Excess reserve( balance)s.” I add “balances” because this explicitly refers to that particular type of holdings — deposits at the Fed. A bank could (in theory) have sufficient required reserves held in treasuries and vault cash, so all of its reserve balances at the Fed could be “excess reserves.” (Depending on which of the bank’s assets you might want to point to and arbitrarily call its “required reserves.” That thing is a regulatory (pro)portion, not a specific set of financial assets, or a balance-sheet entry.)

What’s funny here: Excess Reserves are explicitly not reserves in the sense of “funds that are required to be ring-fenced under law so depositors can withdraw their money or transactions can clear.” By definition, they’re the banks’ deposits at the Fed that are not ring-fenced.

So excess reserves are not actually “reserves.” That’s what “excess” means. No wonder people get confused.


Required reserves aren’t necessarily held in the form of reserve balances.

Reserve balances are not necessarily required reserves.

(Which is why I would prefer a better term than “reserve balances.” Fed deposits?)

Cross-posted at Angry Bear.


  1. June 12th, 2013 at 22:27 | #1

    Are you sure the Fed’s definition is the same for all countries?

  2. wm_
    June 13th, 2013 at 01:56 | #2

    Monetary base = bank reserves (required + excess [+ free/voluntary?]) + currency with the public (does this include cash in bank vaults?)

    What is the residual here?:

    residual (free/voluntary reserves) = monetary base – currency – required reserves – excess reserves

  3. June 13th, 2013 at 08:30 | #3


    Excess reserves are free/voluntary, no?

    “currency with the public (does this include cash in bank vaults?)”

    Yes. Liability of the Fed vis-a-vis the whole private sector, banks and non-banks.

    “What is the residual here?”

    It looks like the residual should be coins.

    But: I’m not sure whether REQRESNS is talking about required reserve balances before or after considering other bank holdings that qualify as reserves..

    In any case excess (free/voluntary) reserve (balance)s is just EXCRESNS.

  4. June 13th, 2013 at 08:47 | #4

    Ramanan :

    Are you sure the Fed’s definition is the same for all countries?

    No. According to Nick Edmonds: “In the UK, reserves (in this context) usually just means commercial banks’ holding of reserve balances at the central bank, so reserves and reserve balances are pretty much the same thing.”

  5. brookside
    June 13th, 2013 at 23:11 | #5

    First, banks must hold required reserves “in the form of vault cash or deposits with the Federal Reserve Banks.” US Treasuries, gold (do banks even hold gold?) and other “safe” assets cannot be used to meet reserve requirements. The Fed has a short summary of reserve requirements on their website. ( )

    Excess reserves simply refers to the amount of vault cash and fed deposits a bank holds in excess of the Fed’s required reserves. Prior to September, 2008 banks with excess reserves (usually small retail or community banks) would led them to banks that were short of required reserves (usually large regional or money center banks). These loans were usually short term (like overnight) and unsecured and are referred to as Fed Funds. The Federal Reserve set a target interest rate for fed funds which is called the fed funds rate. The Fed used its open market operations to ensure that the supply of and demand for excess reserves was in balance and that the banking system as a whole had zero excess reserves. Monetary policy is simply (1) set fed funds rate and (2) use open market operations to add or withdraw reserves as necessary to maintain the fed funds rate. In September, 2008 the Fed quit doing monetary policy and began doing financial system rescue.

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