Bank Reserve

A bank reserve is a sum of money that a bank is required to keep in reserve, either in cash or in easily convertible assets, to meet its depositors' demands. The reserve requirement is a fraction of the bank's total deposit liabilities. The reserve requirement is set by the central bank of the country.

The purpose of bank reserves is to ensure that banks are able to meet their depositors' demands for cash withdrawals. If a bank does not have enough reserves, it may not be able to meet its depositors' demands, which could lead to a bank run. A bank run occurs when a large number of depositors withdraw their money from a bank at the same time. A bank run can cause a bank to fail.

The reserve requirement is a tool that the central bank can use to control the money supply. By increasing the reserve requirement, the central bank can reduce the amount of money that banks can lend. This can slow down economic growth. By decreasing the reserve requirement, the central bank can increase the amount of money that banks can lend. This can stimulate economic growth.

The reserve requirement is a controversial policy tool. Some economists argue that the reserve requirement is an inefficient way to control the money supply. They argue that the reserve requirement does not affect the amount of money that banks lend. They also argue that the reserve requirement can lead to a misallocation of resources.

Other economists argue that the reserve requirement is an effective way to control the money supply. They argue that the reserve requirement does affect the amount of money that banks lend. They also argue that the reserve requirement is necessary to prevent bank runs.

The debate over the reserve requirement is likely to continue for many years.