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Reserve Requirements vs. Capital Requirements
The Federal Reserve Board regulates banks in the United States. The board sets the reserve requirement for banks, or the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Along with other agencies, such as the Office of the Comptroller of the Currency and the Federal Depositors Insurance Corp., the Fed also establishes banks' capital requirements, or the amount of capital held relative to all the bank's assets.
Depository institutions, such as banks and credit unions, must hold reserves in the form of cash in their own vaults or deposits with Federal Reserve, which pays interest on the deposit. The requirement is a ratio, typically 3 percent or 10 percent of total deposits, depending on the size of the bank. For example, if the total deposits for all customers is $100 million in deposits and the ratio is 10 percent, the bank must hold $10 million in cash in its vaults at all times.
A bank's assets are its loans or other lines of credit to customers. Capital requirements ensure that banks have enough capital to support these loans. The capital also must meet regulated ratios of equity vs. debt (such as bonds). In 2014, federal regulators directed the eight largest U.S. banks to add nearly $70 billion in extra capital so they are better positioned to cover losses incurred in market downturns.
Randi Hicks Rowe is a former journalist, public relations professional and executive in a Fortune 500 company, and currently a formation minister in the Episcopal Church. She has been published in Security Management, American Indian Report and Tech Republic.She has a bachelor's in communications, a master of arts in Christian education and a master of business administration.
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