Cash Reserves
Definition
Cash reserves refer to the amount of money that a bank holds in physical currency or deposits with the central bank, which is not lent out or invested.
Analogy
Think of cash reserves as a savings account for banks. Just like individuals keep some money aside for emergencies or unexpected expenses, banks also set aside cash reserves to ensure they have enough funds to meet customer demands and maintain stability.
Related terms
Excess Reserves: Excess reserves are the additional funds held by banks beyond their required reserves. These funds can be used for lending or investment purposes.
Fractional Reserve Banking: Fractional reserve banking is a system where banks are required to hold only a fraction of their deposits as reserves and can lend out the rest.
Reserve Requirement: The reserve requirement is the percentage of deposits that banks must hold as reserves, determined by the central bank. It influences the amount of money that can be created through lending.
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