Reserve

Important reserve ratios

Central bank	sentence
Chinese People's Bank	13.5%
European Central Bank	1.0%
Federal Reserve System	0.0%
Bank Rossii	3.5%0
Swiss National Bank	2.5%0

In banking , minimum reserves are mandatory assets that credit institutions are required by law to maintain with their central bank . They are not to be held on a daily basis, but on average within a minimum reserve period and currently amount to 1% of the so-called minimum reserve base in the Eurosystem . With the exception of the negative interest rate , banks receive credit interest on these reserves. Central banks of some countries, such as Australia, Canada, Great Britain or Sweden, currently do not require a minimum reserve.

General

Due to the legal obligation, the individual commercial bank cannot use these credit balances at the central bank for any other purpose, for example as a loan on the interbank market . It must therefore base its liquidity planning on the fact that it cannot dispose of the deposited minimum reserve in normal times. “If a bank loses central bank money on one day due to the payment transactions of its customers, for example, this reduces the existing central bank money deposit that the bank maintains due to the minimum reserve requirement. The bank is then free to increase its deposit by borrowing on the money market on the same day - or to wait to see whether it will receive central bank money on the following days ”.

Due to the legal obligation, the minimum reserve is part of banking regulation . The original idea of ​​the minimum reserve was to create a liquidity reserve for the banks when, in times of a banking crisis , there is a risk of mass withdrawals by bank customers (bank rush ). But one quickly recognized its far-reaching economic effects.

history

The minimum reserve as an instrument of central bank policy first appeared in the Free Banking Act of New York State in April 1838. After that, the banks had to hold 100% of the banknotes they issued as well as the deposits held with them in the form of mortgage loans or government bonds . The minimum reserve owes its origin to the customer's need for security. Throughout the US, banknotes in circulation were later to be covered by a cash reserve to ensure that banknotes could be redeemed for coins. When the National Banking Act came into force in February 1863, it was initially only in Louisiana and Massachusetts that reserves against circulating banknotes were required by law. US-wide who created Federel Reserve Act of December 1913, the legal basis for this is that banks in the Federal Reserve System , a reserve ( English "minimum reserve requirements" had) to entertain. From May 1933 the reserve rates could be increased in case of credit expansion. From August 1935 the reserve rates could be varied freely and no longer served to secure liquidity, but advanced to an instrument of monetary policy .

The German Banking Act (KWG) of December 1934 provided for in section 16 of the KWG that banks should hold a variable “cash reserve” at the Reichsbank . The reserve was not only considered to be "not only the first buffer in the event of a run, but the need to add part of the cash reserve from every newly created loan to reduce the tendency to expand the loan". 16 KWG a. F. the legal framework for the minimum reserve was created as a new monetary policy instrument. The reserve called "cash reserve" is the forerunner of today's minimum reserve.

The minimum reserve was first introduced in June 1947 by a state central bank law in the American occupation zone in Germany and raised for the first time in March 1948 by the Bank deutscher Länder . In May 1952, reserve classes were introduced, which were graded according to the amount of reserve liabilities. In February 1956, the Bundesbank Act (BBankG) adopted the minimum reserve regulation in Section 15 (1) BBankG for sight liabilities ( up to 30% of sight liabilities ), temporary liabilities (20%) and savings deposits (10%). It created the prerequisite for the minimum reserve requirement because it is considered a means of monetary and currency policy. Its operational implementation was included in the instruction of the Deutsche Bundesbank on minimum reserves (AMR) of May 1958. After the Bundesbank changed its concept in December 1974 with regard to the importance of individual monetary policy instruments, the minimum reserves were one of the most important instruments of rough control. While the coarse control steered the long-term central bank money requirement, the fine control should correct short-term fluctuations in the money market .

species

A passive minimum reserve exists when the minimum reserve is collected from certain deposits that are booked on the liabilities side of the bank's balance sheet . Accordingly, it is an active minimum reserve if the credit portfolio or lending business is used as a reference for the minimum reserve for the calculation. This was suggested by Hans Büschgen in his 1965 habilitation thesis on minimum reserves. In the case of the minimum reserve growth , the minimum reserve requirement is not related to the deposits subject to minimum reserve requirements, but only to their growth.

Legal issues

The ECB took over in November 1998 the substantially based on the passive reserve German minimum reserve system ( English "minimum reserves" ) and led it in the EU Member States as binding for all banks one. The current minimum reserve system of the Eurosystem is regulated in Article 19 of the Statute of the European System of Central Banks ( ECB Statute ), the EC Council Regulation on the imposition of minimum reserves by the European Central Bank and in the ECB Regulation on minimum reserves . According to Art. 19.1 of the ECB Statute, in order to achieve the monetary policy objectives, the ECB can demand that the credit institutions established in the member states maintain minimum reserves in accounts with the ECB and the national central banks. The minimum reserve rates are globally limited to 10% of the reserve liabilities (Art. 4 Para. 1 ECB Regulation).

calculation

According to Art. 19.1 of the ECB Statute, the basis of calculation are the deposits of deposit business that are subject to reserves . These include deposits due on demand (overnight deposits), deposits with an agreed term of up to two years, deposits with an agreed notice period of up to two years, bank bonds ( savings bonds ) with an agreed term of up to two years and money market paper . Deposits with an agreed term of more than two years, deposits with an agreed notice period of more than two years, repo transactions and bonds with an agreed term of more than two years are generally subject to a minimum reserve requirement, but are currently subject to a reserve rate of zero percent. Of these reserve liabilities, a certain percentage , the minimum reserve rate , must be held as a minimum reserve by the credit institution that is required to hold reserves at the responsible central bank. Applying the minimum reserve rates to the stated reserve liabilities results in the minimum reserve requirement , which is determined as the monthly average. The minimum reserve requirement is determined as follows:

${\displaystyle {\text{Mindestreserve-Soll}}={{\text{( Sichteinlagen}}+{\text{befristete Einlagen}}+{\text{Spareinlagen}}+{\text{Schuldverschreibungen/Repogeschäfte )}}}\cdot {\text{Mindestreserve-Satz}}}$

The actual maintained minimum reserve balances are the reserve Is that be identical to the reserve requirement must. If the actual minimum reserve falls below this minimum reserve target, this is sanctioned with a special interest rate of up to 5 percentage points above the average ECB marginal lending rate (Art. 7 (1a) ECB Regulation). If the minimum reserve target is actually exceeded, there is an excess reserve , which also earns interest. Interest is also paid on the minimum reserve requirement - to compensate for the discontinuation of rediscount loans.

functionality

Excess reserve

If a commercial bank maintains a credit balance with the central bank that exceeds the minimum reserve, the difference is called the excess reserve . In the past, the excess reserves were very small. In the euro zone, however, they increased from 1.2 billion euros in 2009 to 383.0 billion euros in 2012. In the USA, the excess reserves rose rapidly from autumn 2008; in July 2015 they amounted to 2.5 trillion. Dollar.

Excess liquidity

The European Central Bank defines excess liquidity as the sum of the excess reserve and the deposit facility . The excess liquidity rose sharply from autumn 2008.

A. Liabilities included in the minimum reserve with a positive reserve ratio

Insoles:

• overnight deposits
• Deposits with an agreed term of up to 2 years
• Deposits with an agreed notice period of up to 2 years

Issued bonds:

• Bonds with an agreed term of up to 2 years

B. Liabilities included in the minimum reserve with a reserve ratio of 0%

Insoles:

• Deposits with an agreed term of over 2 years
• Deposits with an agreed notice period of over 2 years
• Repurchase agreements

Issued bonds:

• Bonds with an agreed term of more than 2 years

C. Liabilities not included in the minimum reserve

• Liabilities to credit institutions that maintain minimum reserves themselves
• Liabilities to the ECB and NCBs
• Liabilities due to monetary policy measures of the ESCB

method

The obligation to hold a certain amount of minimum reserves does not have to be fulfilled by the commercial banks in the euro currency area to the exact day. The required minimum reserve ( minimum reserve target ) is determined by the ECB on the basis of the reserve liabilities of the previous month's holdings. At the moment, exactly 1% of these reserve liabilities must be held by the banks. However, a flat-rate 100,000.00 EUR exemption can still be deducted from the minimum reserve determined. The minimum reserve determined by this procedure is relevant for the minimum reserve maintenance period beginning in the month after the next.

The calculation of the existing minimum reserve ( actual minimum reserve ) is based on all daily balances on the account at the ECB. The daily stocks are added up and divided by the number of days. The compliance period usually ends on Tuesday of the first or second week of the month. The new minimum reserve period begins accordingly on the following day. The exact date is based on the meetings of the Governing Council .

Accounting

According to Section 12 (2) RechKredV , minimum reserves are shown under the daily balances including daily foreign currency balances at central banks, i.e. they are hidden behind the total central bank balances . They are therefore part of the cash reserve . The minimum reserve is therefore part of the first-degree liquidity , even if it is not available to the depositing banks in normal times.

According to the Capital Adequacy Ordinance (Article 119, Paragraph 4), minimum reserves are given the same risk weight as other claims on the central bank, so they are not counted as a risk position in the own funds .

Economic importance

In contrast to most of the monetary policy measures taken by the central banks, the banks cannot evade the minimum reserves; there is an obligation to contract . The central bank's reserve policy may consist of increasing or decreasing the reserve ratio. Since the minimum reserve is part of the monetary base , an increase (decrease) in the minimum reserve increases (decreases) the central bank money supply . Because changes in the central bank money supply , e.g. B. in the context of quantitative easing , can lead to changes in the interest level and price level , the minimum reserve policy can also indirectly influence the price level and thus the price level stability . The central bank money supply, in turn, is part of the money market, so the minimum reserve policy also has an impact on the money market. Here the increase in the minimum reserve reduces the money supply and vice versa. However , the minimum reserve has no direct influence on the amount of money , which is determined by the deposit money creation of the commercial banks in the context of their lending.

The misleading but widespread notion of a money creation multiplier , which says that a multiple of deposit money can be drawn from central bank money, has been adequately refuted by central banks in various publications, but can nonetheless still be found in some textbooks in which he as is presented as follows:

In a money creation multiplier model, the minimum reserve has a direct impact on the money creation of banks. The reason for this is that the minimum reserve ratio is a - restrictive - component of the money creation multiplier model:

${\displaystyle M1=M0\cdot \underbrace {\left({\frac {1+BH}{RS+BH}}\right)} _{\text{Multiplikator}}}$

${\displaystyle M1}$is the amount of money that results from the multiplier effect, is central bank money, is the reserve ratio of banks (the proportion of deposits that are voluntarily or involuntarily not granted as credit), is the cash holdings of households and companies (the ratio of their cash holdings to their book money holdings ).
${\displaystyle M0}$
${\displaystyle RS}$
${\displaystyle BH}$

This geometric series development means that an increase in the minimum reserve rate leads to a reduction in the money creation potential of commercial banks and vice versa. As a result, banks can grant fewer loans if the minimum reserves are increased, and vice versa

In fact, commercial banks are not limited in their lending - and thus in the creation of deposit money , which is largely determined by M1 - by the minimum reserve if the minimum reserve ratios are sufficiently low, as is the case in developed economies. The granting of loans by commercial banks does not require central bank money ex-ante, since solvent commercial banks always receive the central bank money required to meet the minimum reserve ex-post by depositing the corresponding collateral received when the loan was granted with the central bank. This is done against certain discounts and at the current key interest rate either via the main refinancing operations or the central bank's marginal lending facility .

It should be noted that a commercial bank must have the minimum reserve above the average of a minimum reserve period, but not at the end of a specific day within this period. Limiting lending through the minimum reserve would therefore only have a binding effect if the minimum reserve ratios were very high, as is the case, for example, in some emerging and developing countries or in the context of certain capital controls . However, the reserve requirements of central banks in developed economies are typically so low (currently 1% in the euro area) that they have no limiting effect on money creation by commercial banks . It should be noted that this is not a theory, but a simple description of the factual.

The relationship between the monetary base and the money supply that can be observed in normal times is therefore not a causality, but a correlation which, however, collapses in a liquidity trap , for example .

See also

• Money creation
• Open market policy
• Lombard policy
• Repurchase agreement

Individual evidence

1. ↑ Since January 25, 2019. Minimum reserve ratio reduced. China is pouring more money into the economy. In: n-tv.de. January 4, 2019, accessed March 10, 2019 . 
2. ↑ Since January 18, 2012. https://www.bundesbank.de/Navigation/DE/Aufgabe/Geldpolitik/Mindestreserven/mindestreserven.html
3. ↑ ^{a b} http://www.federalreserve.gov/monetarypolicy/reservereq.htm
4. ^ Deutsche Bundesbank: Minimum reserve
5. ^ Deutsche Bundesbank: Minimum reserve requirement
6. ↑ European Central Bank, Eurosystem , What is the minimum reserve requirement?
7. ↑ Jagdish Handa, Monetary Economics , 2nd, Routledge, 2008, p. 347
8. ^ Deutsche Bundesbank: Minimum reserve requirement
9. ^ Hjalmar Horace Greeley Schacht, Magie des Geldes , 1966, p. 199
10. ↑ Kurt P. Tudyka, System and Politics of the Minimum Reserve , 1964, p. 40
11. ↑ Jens Jessen, Reichsgesetz über das Kreditwesen of December 5, 1934 , p. 56
12. ↑ Alexander Zöller, State Bank of the GDR and Deutsche Bundesbank , in: Deutschland-Archiv, 1991, p. 7
13. ^ Deutsche Bundesbank, Annual Report 1957 , p. 9
14. ↑ Angelika Müller, The minimum reserve , 1992, p. 175 ff.
15. ^ Manfred Borchert, Minimum Reserve Concepts, 1987, p. 108 ff.
16. ↑ Alfred Katz / Claus Köhler, Money Economy: Money Supply and Credit Policy , Volume 1, 1977, p. 271
17. ↑ Regulation (EC) No. 2531/98 of November 23, 1998, Official Journal L 318
18. ↑ Deutsche Bundesbank, Monthly Report June 2015 , p. 36
19. ↑ Deutsche Bundesbank, Monthly Report June 2015, p. 42 *
20. ↑ Excess reserves at FRED.
21. ^ Deutsche Bundesbank: Definition of the deposit facility
22. ↑ ECB Monthly Report January 2014 (PDF), p. 75
23. ↑ ECB Monthly Bulletin January 2014 , p. 77
24. ↑ ecb.int: Publication of the non-binding calendar for the minimum reserve maintenance periods in 2010 and 2011 , May 29, 2009, accessed on June 14, 2011
25. ↑ Alfred Katz / Claus Köhler, Money Economy: Money Supply and Credit Policy , Volume 1, 1977, p. 228
26. ↑ Horst Hanusch / Thomas Kuhn, Introduction to Economics , 1992, p. 255
27. ↑ Peter Bofinger, Grundzüge der Volkswirtschaftslehre , 2011, p. 226
28. ↑ Claudio Borio and Piti Disyatat: Unconventional monetary policies: an appraisal. In: BIS Working Paper 292.Bank of International Settlements, November 20, 2009, p. 19 , accessed on June 10, 2018 . 
29. ^ Deutsche Bundesbank: How money is made. April 25, 2017. Retrieved June 10, 2018 . 
30. ^ Bank of England: Money creation in the modern economy. Archived from the original on June 12, 2018 ; accessed on June 10, 2018 . 
31. ↑ Hilmar Götz, Volkswirtschaftslehre , 1977, p. 165
32. ^ Deutsche Bundesbank: How money is made. April 25, 2017. Retrieved June 10, 2018 . 
33. ↑ European Central Bank: Haircut categories. Accessed June 10, 2018 . 
34. ↑ Deutsche Bundesbank: Frequently asked questions about money creation. Retrieved June 10, 2018 . 
35. ^ Paul De Grauwe: The European Central Bank as a lender of last resort. In: VoxEU.org. August 18, 2011, accessed June 10, 2018 . 
36. ^ Sascha Bützer: (Monetary) Policy Options for the Euro Area: A Compendium to the Crisis . In: Monetary Policy, Financial Crises, and the Macroeconomy . Springer International Publishing, Cham 2017, ISBN 978-3-319-56260-5 , p. 125–162 , doi : 10.1007 / 978-3-319-56261-2_7 ( springer.com [accessed June 10, 2018]).