Bank reserves: definition, formation, purpose

In the modern economic system, organizations such as banks are of great importance. They allow you to accumulate and distribute free funds in society. But, alas, they can also negatively affect his activities in conducting risky operations. It was for this that the concept of bank liquidity was introduced. If things are going wrong with the organization, then you can track this state of things on time. And one of the factors determining the state is bank reserves.

Legislative regulation

Required reserves were introduced to regulate the liquidity of the banking subsystem of the Russian Federation. Also controlled through this mechanism monetary aggregates due to a gradual decrease in the money multiplier. All this is regulated by the following regulatory framework:

1. Article 38 of the Federal Law of the Central Bank No. 86-FZ.
2. By indication of the Central Bank No. 2295-U.
3. Federal Law of the Central Bank No. 395-1 (25th article).
4. Central Bank No. 342-P.

general information

Section 24 of the Banking Law, in order to maintain the physical reliability of credit organizations, obliges them to create reserves in which only the bank’s own capital can be. Doubtful and hopeless assets cannot be used for these purposes. The formation procedure, as well as the reserve of a banking institution, is established in accordance with Article 69 of the Law on the Bank of Russia of the Central Bank of the Russian Federation. But why are they needed? Bank reserves are used to cover possible losses on currency, interest and other financial risks, as well as to guarantee the return of citizens' funds that were invested in a particular institution. Each organization is obliged to fulfill these obligations as soon as it has received the appropriate license. If she decides to postpone this, then it is expected that notifications from the Bank of Russia will come soon, and if they are ignored, fines and other sanctions will come.

Theoretical basis

The formation procedure is established by regulation No. 283-P of the Bank of Russia, which is in force as amended on June 26, 2009. There are several reasons why bank reserves can be used:

1. The credit institution did not fulfill the obligations that were previously assumed.
2. The assets of a financial institution have depreciated.
3. The volume of liabilities / expenses has increased.

But why are required reserves formed? The basis may be:

1. Balance assets for which there is a risk of loss.
2. Contingent liabilities of a credit nature, which are reflected on off-balance accounts.
3. Derivatives transactions provided for by Regulation No. 302-P of the Bank of Russia.
4. Requirements for interest income.

The most famous is the focus of the reserve on the protection of investments of individuals. The money transferred by a financial institution to the Bank of Russia subsequently goes to recover deposit losses if the organization ceases to exist or cannot provide its activities in the full sense.

Categories

When compulsory reserves are formed, they proceed from the principle of priority of the economic component of an operation over its legal form. But since there are a significant number of different features, a system for calculating possible losses is needed. And she is. This system is based on categories. There are 5 in total. Each of them is responsible for a certain state of the operation. To distinguish them, they are numbered:

1. In this case, it is understood that there is neither a potential nor a real threat of loss of funds.There is every reason to believe that the counterparty will fully and timely fulfill all obligations.
2. This category implies that the existence of a potential threat of loss was noted. The reason for this may be shortcomings in the management of the institution, the system of internal control, as well as other negative aspects that will negatively affect the markets where the counterparty operates.
3. This category includes those counterparties whose analysis of the activity revealed a serious potential or moderate real risk of losses. As an example, we can state the crisis state of the markets where the banking institution operates, or the deterioration of its financial situation.
4. This includes those who have simultaneously recorded significant potential and moderate real threats. And also those who have partial losses. An example of a typical bank is the situation in which the counterparty does not fulfill its obligations.
5. This includes those counterparties with respect to whom there are rather significant reasons to believe that they will not be able to fulfill their tasks stipulated by the agreements.

How is the required reserve ratio calculated?

For this, the above categories are used. Depending on the category, the bank must provide a certain percentage of the reservation (relative to the settlement base). The size is established by Regulation No. 283-P. The percentage can either be fixed or be in a certain range. We suggest that you familiarize yourself with the abbreviated content of the above provision:

• 1st category of quality. Provides a reservation of 0%.
• 2nd category of quality. Provides redundancy in the range from 1 to 20%.
• 3rd category of quality. Provides redundancy in the range from 21 to 50%.
• 4th category of quality. Provides redundancy in the range from 51 to 100%.
• 5th category of quality. Provides 100% reservation.

Formation principles

Bank reserves should be created based on the following:

1. All actions must comply with applicable laws, regulations of the Bank of Russia and internal documents of the credit institution itself.
2. When making decisions, an objective and comprehensive analysis of all available information should be carried out, which will take into account all aspects and nuances, so that an optimal reserve is formed.
3. Timeliness of all actions, as well as the reliability of the data used in reporting.

Conclusion

So we examined what constitutes a partial bank reservation. Additionally, you can still talk about certain nuances. So, in the territory of the Russian Federation, the bank's liquidity should be supported by the currency of our state. In this case, all existing risks must be taken into account. To create reserves, only the bank’s own capital should be used. It should also be noted the negative consequences that financial institutions may face if they ignore regulatory features. In such cases, the Bank of Russia applies organizational coercive measures to them. Initially, directives are sent that contain the requirement to eliminate violations. If it is not fulfilled, fines or other sanctions may be applied.