Reserves of banks and their formation. Required bank reserves and their norm

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

With the advent of the Central Bank and the development of the system of financial regulation at the state level, reserves of commercial banks, as well as credit organizations, were created. At their expense, the amount of balances on the corresponding (reserve) accounts or the conditions for their replenishment are controlled. Let us further consider what the bank's required reserves are.

General information

Bank reserves ensure the availability of funds for the uninterrupted fulfillment of payment obligations regarding the return of deposits to depositors and settlements with other financial institutions. In other words, they act as a guarantee. Reserves must be held in cash as deposits with the Central Bank or in the form of securities to secure liabilities.

Requirements

Today, almost all countries with a market economy introduced the norm of required bank reserves. The effectiveness of this instrument of financial and credit regulation has been confirmed both by fundamental research and world practice. In the Russian Federation, the minimum requirements also act assource of repayment of obligations to creditors and depositors in the event of revocation of the organization's license to carry out operations. In practice, the return of funds constituting the reserve of the Central Bank is clearly regulated. The minimum requirements are mainly used in the framework of financial and credit regulation in solving long-term problems of stabilizing the circulation of money and in the fight against inflation. This tool acts as a limiter on the growth rate of cash and regulates the demand for bank reserves. Its specific purpose is given in Regulation No. 342. In accordance with the definition given in this act, the use of this instrument ensures the regulation of the overall liquidity of the banking structure of the Russian Federation. Cash control is carried out by reducing the money multiplier.

Main goal

In the practice of financial institutions, there is always a risk of unplanned losses. No institution is 100% immune from them. In this regard, in the course of functioning and in the process of risk management, each financial institution must ensure the formation of bank reserves. To guarantee its reliability, the organization is obliged to create various funds, the funds from which will be directed to cover probable losses. The order in accordance with which the formation and subsequent use of them is carried out, in most cases, is established by legislative acts and the Central Bank. The amount of deductions from profit before tax is regulated by the Federal Law ontaxes. The minimum amount of bank reserves is set by the Central Bank. As practice shows, the use of a "reserve" is appropriate when there is an objective need to reduce the money supply in circulation (suspend or control growth) in order to prevent the "overheating" of the economy, if this goal is achieved by limiting the credit capabilities of financial institutions through the withdrawal of a certain share of borrowed money from them. funds (or an increase in this part). It follows from this that the reserve of the Bank of Russia is the funds of financial institutions, accumulated as termless deposits, which should be excluded from any turnover.

Classification

Bank reserves, in general, have one purpose - to compensate for likely costs or losses if necessary. However, they are divided into types. Thus, the required reserve is a tool through which the overall liquidity of the system is regulated. It is used by the Central Bank to ensure the control of funds by reducing the accumulation of money in commercial banks. This mechanism limits the credit facilities of financial companies and maintains the money supply in circulation at a certain level. At its core, required reserves are funds that commercial banks must keep in the Central Bank. They act as a guarantee financial fund, ensuring reliability in fulfilling obligations to their customers. Such bank reserves are created not so much in the interests of the organization itself. They act as an instrument of the state monetary policy. Beinghighly liquid, these assets cannot be fully utilized by financial institutions in the event of unfavorable circumstances. For example, if an outflow of depositors' funds began in an institution, then the reserve can be used exclusively within the established standard.

Fund

It is presented as part of the equity, formed by annual deductions from profits. The reserve fund is necessary to cover losses arising in the course of the activities of a financial institution. It is also created to increase the authorized capital. The rate of deductions is determined at the general meeting of shareholders. The value can be any within the established size of the authorized capital. A financial enterprise has the right to allocate funds to the reserve fund only when there is a profit. Its replenishment, therefore, is carried out due to the increase in net asset. The fund accumulates funds received by the financial institution in the course of its activities. When making transfers from profits to the fund, a banking organization provides for the use of a share of its assets exclusively in certain areas. The main one is loss coverage.

Bank reserves for probable loan losses

Their creation is determined by credit risks that may arise in the course of activity. Such allowances help prevent fluctuations in profits when writing off loan losses. Thus, there is an impact on the amount of capital. The formation of such reserves comes fromdeductions that are expensed on each loan. These funds are used only to cover the outstanding debt on the main obligation. These provisions are used to write off losses on loans that are uncollectible. If there is a shortage of funds, the debt recognized as unrealistic or uncollectible is included in the losses of the reporting period. This reduces the taxable base of the financial institution.

Depreciation funds

Every month on the last business day, investments in shares are revalued at market value. The latter should be understood as the weighted average price of one security for transactions that were made during the last day on the stock exchange or with the help of a trading organizer. In some cases, the actual cost of purchasing a security on the last working date, halved, can be taken as the market price. If it is below the book price, then the financial institution must create an impairment allowance. Its value should not be more than 50% of the specified value. Formation is carried out on the last working date of the month in which the security was purchased. Its write-off is carried out simultaneously with the disposal of the shares. The creation of these reserves, as mentioned above, is carried out separately for each security, regardless of the increase or maintenance of their total value.

Specific provision for impairment

When revaluing investments, it becomes necessary to form reserves. However, while the balance sheetthe value of the securities remains unchanged. As such, these funds are treated less as a reserve than as an accounting adjustment to the share price. At the end of the reporting month, credit institutions must re-evaluate the reserves created earlier for the depreciation of investments, taking into account the market value and the number of securities.

Other species

Besides the above, there are other bank reserves. They are combined into a group of probable losses for other assets. These include, in particular, reserves:

• Under balance sheet assets with risk of loss.
• For a number of instruments reflected in off-balance sheet accounts.
• For futures deals.
• Under other losses.

Loss classification

Possible losses of a financial organization that cause the formation of reserves should be understood as hypothetical risks in the coming periods associated with the occurrence of the following circumstances:

1. Increase in expenses or liabilities compared to previously recorded in accounting.
2. Decrease in the value of the credit company's assets.
3. Failure to fulfill obligations assumed by the counterparties of the financial institution in connection with completed operations (transactions) or in connection with the failure to fulfill the promise of the subjects, the proper repayment of debt of which is ensured by the servicing banking organization.

Of the above bank reserves, only the fund is considered the most efficient. This is due to the fact that at the expense of the funds that form it, a financial institution can control its costs. All other bank reserves are not considered as effective. This is because increasing their size will not enhance the ability of the organization to withstand emerging adverse circumstances.

Bank's gold and foreign exchange reserves

They are highly liquid financial assets. Gold and foreign exchange reserves are administered by the Central Bank and the Ministry of Finance. They include:

1. Monetary gold.
2. Special borrowing rights.
3. Reserve position in the World WF.
4. Foreign currency.

These inventories are valued at the balance sheet date in US dollar terms.

Destination

Gold and foreign exchange reserves act as a financial reserve, which, if necessary, can be used to pay government debt or carry out budget expenditures. Their presence, in addition, allows the Central Bank to exercise control over the dynamics of the ruble exchange rate through interventions in the foreign exchange markets. The size of this reserve should largely cover the amount of the money supply in circulation, ensure both private and sovereign payments on external debt and guarantee 3-month imports. If such a value of gold and foreign exchange reserves is reached, the Central Bank will be able to exercise effective control over the movement of the ruble exchange rate and interest rates.