Why is reserve requirement important

Reserve requirements are still regarded as an important monetary policy tool in a number of major countries including Korea, although used less frequently than in the past as the monetary base-focused orientation of monetary policy has shifted to an interest rate-focused orientation around the world from the s. The financial institutions subject to the current reserve requirement regime include commercial banks and specialized banks.

In a fractional reserve system, banks are only required to hold reserves against a fraction of their deposits. For additional detail, see the H. See Financial and Business Statistics. Table 1. Money Stock and Debt Measures. Skip to content Readability Tools.

Reader View. Lowering the reserve requirement pumps money into the economy by giving banks excess reserves, which promotes the expansion of bank credit and lowers rates.

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Your Practice. Popular Courses. Part Of. These are called minimum reserves. Banks have to make sure that they meet the minimum reserve requirement on average over the maintenance period.

So they do not have to hold the total sum in their current accounts at the central bank on a daily basis. This functions like a valve, allowing banks to react to short-term changes in the money markets, where banks lend to each other, by adding or withdrawing funds from their reserves at the central bank.

This helps to stabilise the interest rate banks charge each other for short-term funds. The total reserve requirements for euro area banks stand at around billion euro beginning of