What is the bank reserve

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The bank reserve and its functions

Speaking of bank reserve of a countryWe refer to a percentage of your products that must be kept frozen in order to receive public capture. Within the economy we can reflect them as what the central bank does with money; When the central bank uses a reserve, it does so to increase or decrease the amount of money held within the country.

High lace

When you have a type of lace that has a tendency to rise, the country's entities begin to have fewer resources to make loans or credits of any kind; This means that the number of reservations must be greater.

Through this measure, The Central Bank can ensure that the banks that are governed by this system y cumplan con las normas que se les indiquen; siempre tendrán suficiente capital para poder prestar cuando be necesario.

What is this system used for?

It is a system that takes care of raise money to be able to lend it later and is based on market speculation. Once it has raised money, the bank must keep a small part and another uses it to have money flow, that small part that the bank reserves is the bank reserve.

An example of this is the following

Para que lo comprendas un poco mejor, te vamos a dar un ejemplo sencillo. El banco capta a un client que abre una cuenta con un millón de euros. De ese millón de euros, el banco utilizará una parte para poder invertir; pero no puede usar el millón completo por lo que lo más saludable sería ahorrar 150.000 euros de reserva bancaria.

Types of lace

Within the lace, there are different types of lace. The more solvent the financial instrument, the greater the legal reserve; since that means that at any time the person can ask for money from the bank and it must respond.

This is one of the most common cases in checking accounts, since the person needs to have that money at any time to be able to use it in their daily payments and the bank must give it to them when they need it.

Most banks prefer not to use money from checking accounts to invest and they do not pay interest for this type of account, since it is money with which they cannot work and you cannot own it.

When the lace of a bench is very lowThis can generate some distrust in the person who deposits their savings there, since there is a high probability that they will not be able to get their money back.

Why can't the bank return my money?

Esto no es normal, fundamentalmente en cuentas corrientes como hemos comentado en la parte superior. No obstante, imaginemos que un banco dispone de una reserva muy bancaria y empieza a invertir todo el dinero de sus clientes. Las persons que han depositado allí sus ahorros quieren recuperar su dinero, no obstante el banco no puede dárselo aún cuando quiera, dado que ese dinero se ha utilizado para hacer inversiones y no se encuentra disponible. Si el banco tuviera una tasa de reserva alta, esto no sucedería dado que tendría suficiente liquidez para entregar el dinero a las personas que lo soliciten en ese momento y recuperar el resto con las inversiones.

However, in case a moment of financial chaos and all the people want to withdraw their money at the same time, it would enter a bank collapse in which said bank would not have the necessary solvency to deliver the money to all the people who demand it and at this point an economic rescue of the central bank or the merger of said bank with a larger one would enter, even though the second option entails much more time and only happens when banks are bankrupt.

Who is in charge of determining the legal reserve

The central bank is in charge of offering a legal reserve for each bank. Said central bank has the power to do so in public entities or any type of private entity.

What is the percentage of deposits that must be had for said reserve defined by the Central Bank?

An adjustment for a public institution is not the same as for a private institution.

For private organizations, there must be a single reserve of 2% of the total when it consists of

1. Deposits and deposits
2. Securities registered in the stock market

When it consists of public sector organizations, what is defined is a unique reserve of the 4% for any type of collection or deposit that is made, at the same time of the values registered in the Stock Exchange.

What are the instructions to follow when a settlement procedure occurs?

When the entities are in the liquidation procedure, they do not have any type of obligation when complying with the reserve requirements, since no compliance of this type will be required.

When a mandatory reserve account is in an institution that in the central bank, as it should be established

In private organizations. You have to have the 100% in euros and that all the private organizations in the place have an account with the central bank.

You have to have up to 75 of the repayments of financial instruments that have been issued through the central bank in less than a year
In public organizations. You must have at least one 05% of cash regardless of what is established in the liquidity reserves.
In the percentage that remains until completing the 4% that public organizations must have, it will be for reserve investment certificates issued by the central bank with a refund of money of less than one year.

How precisely does the bank reserve function according to the rules of the central bank?

When the reserve begins to rise, a greater number of entities begin to have less memory to be able to provide credits or loans to people who need them. This means that these entities must leave a larger reserve capital to be able to cover their expenses and loans during this time. When this happens, there is much less money to lend to people and much less circulating, resulting in reduced liquidity.

At the moment in which the central bank lowers the percentage of legal reserve, the banks once again have economic solvency and it enables them to once again offer loans to corporations and banks nationwide. This causes people to start having a much greater amount of money to lend and the amount of money that is generated begins to flow.

In this graph you can see a little better what we mean.

Within the Central Bank, the following points are determined that all entities must comply with

1- It must be established what is the minimum reserve interest rate that is within what is legal and what are the reserve rates that must be determined.
2- It must be controlled that all banks and organizations comply with the type of legal reserve established and if they do not do so, the central bank can impose sanctions on entities that are not within the legal framework.
3- The Central Bank determines which are the periods of legal reserve that must be fulfilled and ensures that all fulfill them.
4- The Central Bank is the one who determines what are the obligations that each of the banks must have when determining a legal reserve.
5- Define what is the calculation for the application of the lace and also teach the method.
6- Give orders on the points that a report must contain when presenting said requirements.
7- Issues the general rules that an adjustment must have at the political level.

What are the main effects on the legal reserve established by the Central Bank?

1. Deposits delivered to customers in each of the banks are much better controlled and with greater security.
2. There is a greater amount of liquidity.
3. It is one of the best tools to control the currency of a country.
4. It is possible to control which is the expansion of the credits in each mortgage.
5. Rate variations may begin to apply
6. It can affect national reserves if good control is not carried out
7. It can put the country at risk if the reserves are not carried out with precise administration.