Bank reserves
Deposits that commercial banks hold at the central bank — the settlement asset banks use to pay each other, and a liability of the central bank rather than an asset it owns.
Also called: reserve balances, central bank reserves.
Reserves are the top of the money hierarchy. When one bank pays another, what moves between them is reserves, and reserves exist only as entries on the central bank's own balance sheet.
Only eligible institutions — broadly, banks — can hold them. A household, a company or a money market fund cannot open a reserve account, which is why the central bank needs separate facilities to reach non-banks at all.
Reserves cannot leave the banking system through lending. A loan moves deposits between customers; only two things change the total quantity of reserves: the central bank creating or destroying them, and the public converting deposits into banknotes.
The mechanics
- Whose liability
- The central bank's. On a commercial bank's sheet the same balance appears as an asset.
- How they are created
- The central bank buys an asset or lends, and credits a reserve account with money it issues on the spot.
- How they are drained
- Asset sales or maturities, cash withdrawals, a rising Treasury account, or take-up at the reverse repo facility.
The common misreading
That banks lend out their reserves. They do not — reserves never leave the banking system when a loan is made. Lending creates a new deposit, and the bank's reserve position only changes when the borrower's payment settles somewhere else.
Related terms
- Monetary baseThe total of banknotes in circulation and commercial bank reserves — every form of money that is a direct liability of the central bank.
- Interest on Reserve BalancesThe rate the Federal Reserve pays banks on the reserves they hold with it — the administered rate that anchors the floor of the US policy corridor for banks.
- Overnight Reverse Repurchase Agreement FacilityA Federal Reserve facility where eligible non-banks lend cash to the Fed overnight against Treasury collateral, putting a hard floor under short-term interest rates.
- Treasury General AccountThe US Treasury's operating account at the Federal Reserve — the government's chequing account, and a central bank liability that competes directly with bank reserves.
Primary sources
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