Part II: Liquidity 67
67 Part II: Liquidity 4 Liquidity and reserve requirements Some central banks still impose reserve requirements (required reserves) on commercial banks. The reasons for their existence are of rather historical and technical character than economic. Reserve requirements consist in the obliga- tion of commercial bank to hold a certain balance (liquidity) on its clearing ac- counts (nostro accounts) at central bank so that the average liquidity of any bank during a period is equal or higher than the reserve requirement of this commer- cial bank. Some central banks allow commercial banks to include in this obliga- tion the currency held in their vaults. The amount of reserve requirement is cal- culated as the reserve ratio (set by central bank) multiplied by the volume of commercial bank’s reservable liabilities (the so-called reserve base). Reserve requirements in many countries historically decline. In some countries reserve requirements do not exist anymore (e.g. in Canada, Denmark, Mexico, New Zealand, Norway and Sweden). Originally, there was no interest paid on required reserves. But central banks in countries, where required reserves were not abandoned yet, started to pay the interest on them. Interest is mostly based on interbank interest rates. In some countries, one part of reserves does not bear interest, and the other part does.7 4.1 Liquidity and bank reserves Liquidity is generally the term for balances on interbank (commercial banks and central banks) current accounts but not balances on interbank term accounts. For the liquidity of commercial banks on central bank’s current account (clear-...
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