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Definition of Reserves

Reserves Image 1

Reserves

Commercial banks' reserves consist of their holdings of cash and their balances in deposits with the central bank. See also foreign exchange reserves, excess reserves, required reserves, reserve requirement.



Related Terms:

Excess reserves

Any excess of actual reserves above required reserves.


Free reserves

Excess reserves minus member bank borrowings at the Fed.


Official reserves

Holdings of gold and foreign currencies by official monetary institutions.


Required reserves

The dollar amounts based on reserve ratios that banks are required to keep on deposit at a Federal Reserve Bank.


Excess Reserves

reserves of commercial banks in excess of those they are legally required to hold.


Foreign Exchange Reserves

A fund containing the central bank's holdings of foreign currency or claims thereon.


International Reserves

See foreign exchange reserves.


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Required Reserves

reserves that the central bank requires commercial banks to hold.


Cookie Jar Reserves

An overly aggressive accrual of operating expenses and the creation of
liability accounts done in an effort to reduce future-year operating expenses.


Counterpart items

In the balance of payments, counterpart items are analogous to unrequited transfers in the
current account. They arise because the double-entry system in balance of payments accounting and refer to
adjustments in reserves owing to monetization or demonetization of gold, allocation or cancellation of SDRs,
and revaluation of the various components of total reserves.


Discount window

Facility provided by the Fed enabling member banks to borrow reserves against collateral
in the form of governments or other acceptable paper.


Federal funds

Non-interest bearing deposits held in reserve for depository institutions at their district Federal
Reserve Bank. Also, excess reserves lent by banks to each other.


Federal funds market

The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.


Federal funds rate

This is the interest rate that banks with excess reserves at a Federal Reserve district bank
charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction
of U.S. interest rates.


International Monetary Fund

An organization founded in 1944 to oversee exchange arrangements of
member countries and to lend foreign currency reserves to members with short-term balance of payment
problems.


Other capital

In the balance of payments, other capital is a residual category that groups all the capital
transactions that have not been included in direct investment, portfolio investment, and reserves categories. It
is divided into long-term capital and short-term capital and, because of its residual status, can differ from
country to country. Generally speaking, other long-term capital includes most non-negotiable instruments of a
year or more like bank loans and mortgages. Other short-term capital includes financial assets of less than a
year such as currency, deposits, and bills.


Regulation D

Fed regulation currently that required member banks to hold reserves against their net
borrowings from foreign offices of other banks over a 28-day averaging period. Regulation D has been
merged with Regulation M.


Regulation M

Fed regulation currently requiring member banks to hold reserves against their net borrowings
from their foreign branches over a 28-day averaging period. Reg M has also required member banks to hold
reserves against Eurodollars lent by their foreign branches to domestic corporations for domestic purposes.


Subject to opinion

An auditor's opinion reflecting acceptance of a company's financial statements subject to
pervasive uncertainty that cannot be adequately measured, such as information relating to the value of
inventories, reserves for losses, or other matters subject to judgment.


Deposit Creation

The process whereby the banking system transforms a dollar of reserves into several dollars of money supply.


Discount Rate

The interest rate at which the Fed is prepared to loan reserves to commercial banks.


Discount Window

The Federal Reserve facility at which reserves are loaned to banks at the discount rate.


Official Settlements Account

An account within the balance of payments accounts showing the change in a country's official foreign exchange reserves. It is used to measure a balance of payments deficit or surplus.


Reserve Currency

A currency, frequently the U.S. dollar, that is used by other countries to denominate the assets they hold as international reserves.


Reserve Requirement

Fraction of total deposits that a commercial bank is required by the central bank to hold in the form of reserves.


Change in Accounting Estimate

A change in the implementation of an existing accounting
policy. A common example would be extending the useful life or changing the expected residual
value of a fixed asset. Another would be making any necessary adjustments to allowances for
uncollectible accounts, warranty obligations, and reserves for inventory obsolescense.


Dividend

As the term dividend relates to a corporation's earnings, a dividend is an amount paid per share from a corporation's after tax profits. Depending on the type of share, it may or may not have the right to earn any dividends and corporations may reduce or even suspend dividend payments if they are not doing well. Some dividends are paid in the form of additional shares of the corporation. Dividends paid by Canadian corporations qualify for the dividend tax credit and are taxed at lower rates than other income.
As the term dividend relates to a life insurance policy, it means that if that policy is "participating", the policy owner is entitled to participate in an equitable distribution of the surplus earnings of the insurance company which issued the policy. Surpluses arise primarily from three sources:
1) the difference between anticipated and actual operating expenses,
2) the difference between anticipated and actual claims experience, and
3) interest earned on investments over and above the rate required to maintain policy reserves. Having regard to the source of the surplus, the "dividend" so paid can be considered, in part at least, as a refund of part of the premium paid by the policy owner.
Life insurance policy owners of participating policies usually have four and sometimes five dividend options from which to choose:
1) take the dividend in cash,
2) apply the dividend to reduce current premiums,
3) leave the dividends on deposit with the insurance company to accumulate at interest like a savings plan,
4) use the dividends to purchase paid-up whole life insurance to mature at the same time as the original policy,
5) use the dividends to purchase one year term insurance equal to the guaranteed cash value at the end of the policy year, with any portion of the dividend not required for this purpose being applied under one of the other dividend options.
NOTE: It is suggested here that if you have a participating whole life policy and at the time of purchase received a "dividend projection" of incredible future savings, ask for a current projection. Life insurance company's surpluses are not what they used to be.


Equity

The net worth of a business, consisting of capital stock, capital (or paid-in) surplus (or retained earnings), and, occasionally, certain net worth reserves. Common equity is that part of the total net worth belonging to the common shareholders. Total equity includes preferred shareholders. The terms common stock, net worth, and common equity are frequently used interchangeably.


 

 

 

 

 

 

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