Question

In: Economics

Excess reserves

Expert Solution

Excess Reserve: The term excess reserve refers to the reserve which is made over and above the statutory requirements.

Excess Reserve= Required or Mandated Reserve- Actual Reserve.

They are basically excess amount reserved by banks and financial institutions over and above the requirement mandated by the regulators.

Advantages of Excess Reserve: There are following advantages of excess reserve:

1. More Liquidity in hand of institution.

2. More Investors are inclined towards the institution with high reserves.

3. High credit ratings and market worth.

4. Higher market capitalization.

5. More safety in the time of crisis.

6 Less requirement of short term fundings and loans.

7. Low cost of borrowing.

Besides the advantages, there are some disadvantages also which as follows:

Disadvantages of Excess Reserves: These are as follows:

1. Loss of opportunity to lend.

.2 Loss of interest and income.

3. High cost of holding reserves.

4. Lack of dynamic treasury management.

5. Loss of trust by stake holders.

6 Idle capital and low future earnings.

It is always advisable for every financial institution to keep the required reserve only with some buffer and always have active treasury in the company to keep track on reserves and funds position to get maximum productivity as cost of funds needs to be minimum for every financial company to remain profitable.

Rahul Sunny answered 2 years ago

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