Question

Explain three ways in which a bank could increase reserves if needed to meet the reserve requirement.

Answer 1

Reserve requriremnet of a bank refers to the minimum amount of reserve that it should hold against deposit liabilities. Mainly Central bank of a country instructs every bank under it to maintain the required reserve which is a percent of the total deposit which stabilises and helps the banking institution from any financial uncertainities. Central bank regulates that kind of monetary policy depending on the economic condition on the country which requires banks to hold a minimal reserve ratio when it wants to enpand economic growth which enable banks to sanction more loans leading to increasing interest in the market. While the central bank intends to slow down the economy, it raises the reerve ratio of banks which prevent them from lending more loans. So when banks need to meet their reserve requirement they could opt for-

1) borrowing reserve from the central bank of the country.

2) borrowing reserve from other commercial bank

3) or borrowing from banks who have excess reserve available in their account.