December 2000 - Article - Minimum reserve requirements
H F Nel
Last Modified Date:
2020-10-01, 09:30 PM
Quarterly Bulletins > Articles and Notes
Central banks became custodians of the cash reserves of commercial banks by a process of evolution, which was closely associated with their functions as sole issuer of notes and coin and as banker for government. Over time, it became the practice in many countries for banks to entrust their surplus cash to the central bank, partly because the latter issued notes that could be bought by using part of these reserve balances. Similarly, keeping reserve balances with central banks became convenient, since the latter took on the responsibility of being the banker for government and since the purchase of government securities could be facilitated by tapping reserve balances held with the central bank. This practice of maintaining reserve balances with central banks developed further as central banks assumed the function of being settlement banks, that is the settlement of the clearance differences between banks. Central banks originally became the custodian of banks’ cash reserves partly for prudential reasons, in other words, to protect the liquidity, solvency and safety of banks, and partly to safeguard their own financial position. The money-creating capacity of banks is also materially influenced by the amount of reserve balances that the banks keep with the central bank. Consequently, adjustments in the minimum required reserve balances of banks have been widely used as an instrument of monetary policy. Nevertheless, as countries placed more emphasis on market-related instruments of monetary policy during the 1980s, minimum reserve requirements did diminish in importance as a monetary-policy instrument. Since the 1980s there has, however, been a general tendency towards simplifying the calculation of reserve requirements and lowering reserve ratios.