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Reserve Requirements Vs. Capital Requirements

Reserve Requirements Vs. Capital Requirements thumbnail
Reserve and capital requirements ensure banks' financial security.

Banks are regulated to ensure their financial security by adhering to reserve and capital requirements. These requirements are imposed and supervised by agencies of the federal government, such as the Federal Reserve Board of Governors and the Federal Deposit Insurance Corp.

  1. Reserve Requirements

    • Banks are required to hold a certain percentage of their total deposits as cash. This requirement ensures that there is money available to cover customer withdrawals.

    Purpose of Reserve Requirements

    • Because banks use deposits to invest and lend, the reserve requirement ensures that all of the money is not invested at one time.

    Capital Requirements

    • Capital requirements ensure that banks hold in cash a percentage of the amount of money invested.

    Purpose of Capital Requirements

    • By adhering to this requirement, banks are able to simultaneously absorb investment losses and cover withdrawals. This ratio between investments and cash also helps determine a bank's safety relative to other banks.

    Effect of Requirements

    • The effect of these regulations is to help ensure the banking system remains as stable as possible. The FDIC and the Federal Reserve balance the safety of customer deposits with the desire of the bank to invest those deposits.

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