Bank Reserves

Settling balances that banks keep at the central bank. They are not lendable to customers, and they are why one bank can run short while the system as a whole cannot.

What a reserve is

Bank reserves are deposit balances that commercial banks hold at the central bank. They are used to settle payments between banks, to meet any reserve requirement and to hold liquidity. They are part of base money, and the public never sees them.

A reserve is not cash in a vault and it is not a loan to a customer. It is a ledger entry at the central bank, and only a bank can hold one.

Not lendable, but movable

When you pay someone who banks elsewhere, the two banks settle by moving reserves between their accounts at the central bank. The total quantity of reserves does not change in the payment; only the owner does.

Individual short, system whole

A single bank can find itself short of reserves at the end of the day even though the system holds exactly what the central bank created. Reserves cannot be conjured by one bank, so it must borrow them from another bank or from the central bank itself.

That is the difference between a liquidity problem and a solvency problem. The policy rate is the price at which reserves are borrowed and lent overnight, and quantitative easing changes the quantity of them. One checkable use: ask whether the complaint is about one bank or the whole system, because the two have different fixes.

Related: Base Money · Broad Money · Credit Creation

Next: Credit Creation