Central Bank Balances and Reserve Requirements

IMF Working Papers, February 1, 2011

Source details

Most central banks oblige depository institutions to hold minimum reserves against their liabilities, predominantly in the form of balances at the central bank.
The role of reserve requirements has evolved significantly over time.
The overlay of changing purposes and practices has resulted in situations where it is not always fully clear what the current purpose of reserve requirements is.
Unclear purpose complicates the design and structure of a reserve regime.
The paper identifies three main purposes for reserve requirements:
- Prudential
- Monetary control
- Liquidity management
The paper illustrates current practices using a 2010 IMF survey of 121 central banks.

Evolving and overlapping purposes (prudential, monetary control, liquidity management) create trade-offs and implementation challenges for central banks when structuring reserve regimes.
Ambiguity about the primary objective of reserve requirements affects decisions on levels, composition (e.g., balances at the central bank vs. vault cash), and supporting operational frameworks.
Understanding contemporary practices (as reported in the 2010 IMF survey of 121 central banks) is important for benchmarking and designing best-practice reserve frameworks.

Structure reserve regimes with clarity on primary objectives (prudential, monetary control, or liquidity management).
Align reserve instrument composition and operational details with the identified primary objective(s).
Use international practices (e.g., findings from the 2010 IMF survey of 121 central banks) to inform reforms and operational implementation.

Subject: Banking, Central bank policy rate, Commercial banks, Currencies, Reserve requirements
Keywords: excess reserves, exchange rate, foreign currency, liquidity management, vault cash, WP

Source: IMF Working Papers — "Central Bank Balances and Reserve Requirements", Simon T Gray, Working Paper No. 2011/036, February 1, 2011.