Introduction to Finance

Career Opportunities in Finance

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5.7 Factors Aff ecting Bank Reserves
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The borrower of the $8,000 must build up his or her deposit account by $8,000 to be able 
to repay the loan. This is refl ected on the books, as follows:
Bank A
Assets
Liabilities
Reserves
$10,000
Deposits
$18,000
Loans
$8,000
After the $8,000 is repaid, the books show the following:
Bank A
Assets
Liabilities
Reserves
$10,000
Deposits
$10,000
If no new loan is made from the $10,000 of reserves, deposit contraction will result. This 
is true because $8,000 of funds have been taken out of the banking system to build up deposits 
to repay the loan and are now being held idle by Bank A as excess reserves. Furthermore, 
taking out $8,000 of reserves from the banking system may be cumulative on the contraction 
side just as it was during expansion.
5.7
Factors Aff ecting Bank Reserves
The level of a bank’s excess reserves determines the extent to which deposit expansion (or 
contraction) takes place. This is true for an individual bank or other depository institution, and 
for the banking system as a whole. Therefore, the factors that aff ect the level of bank reserves 
are signifi cant in determining the size of the money supply. 
Bank reserves
for a depository 
institution are its vault cash and funds held at its regional Federal Reserve Bank and used to 
meet reserve requirements. Bank reserves for the banking system are the cumulative total of 
the individual depository institution bank reserves. 
Bank reserves can be divided into two parts. The fi rst, 
required reserves
, is the min-
imum amount of reserves that a depository institution must hold against its deposit liabilities. 
The percentage of deposits that must be held as reserves is called the