Bank reserves are the funds that a bank keeps on hand to meet its customers’ demands for withdrawals. They also serve as a buffer against unexpected deposit losses. The amount of reserves a bank is required to hold varies depending on the country in which it operates, but typically ranges from 2% to 10% of its deposits.
Why are bank reserves so important? Because they play a key role in ensuring the stability of the banking system. When customers make withdrawals, banks need to have enough cash on hand to meet those demands. If a bank doesn’t have enough reserves, it may have to turn to other sources of funding, which can be difficult and expensive.
In addition, bank reserves help protect against deposit losses. If a bank has more reserves than it needs to cover customer withdrawals, it can use those funds to cover any unexpected losses from deposits that are returned or cancelled.
So, in short, bank reserves are important because they help ensure the stability of the banking system and protect against deposit losses. By understanding how bank reserves work, we can better understand how the banking system works as a whole.