Question

Explain at least three factors that will affect the quantity of reserves that a bank wishes to hold.

Answer 1

Banks accept deposits from its customers and pays interest to them, so they need to use the money in a productive way to be able to give its customers a fair interst. But if customers are in need of money than they will go to the bank to withdraw cash. So the banks need to keep some amount of money(cash) as reserves for such transactions. But the amount of reserves the bank wishes to hold depends on many factors some of which are mentioned below:

1. The type or banking habits of its customers- If the majority of the customers of a bank are of the habit of withdrawing cash frequently than the bank needs to keep a larger reserve. Or if its customers are such that they may need money anytime (like businessman) than it needs a larger reserve.
2. Types or nature of accounts - If a bank has a larger portion of current account than the banker will require a comparatively larger cash reserve because there is the chance of most of them withdrawing the major portions of their balances at a time.
3. Size of deposits in the bank - A bank which has only a few large deposits has to keep a larger reserve than a bank with numerous small accounts because the larger the number of clients of a bank, the less is the likelihood of any concerted movement towards a withdrawal of deposits.
4. Frequency of use of cheque - In an economy where cheques are used frequently there is need of a lower level of reserve because payments for these checks will, to a large extent, be made by transfer entries in the books of the bank.