With the advent of the Central Bank and the development of a 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 is controlled. We will consider further what constitutes the required reserves of the bank.
General information
Bank reserves ensure the availability of funds for the uninterrupted fulfillment of payment obligations related to the return of deposits to depositors and settlements with other financial institutions. In other words, they act as a guarantee. Reserves should be kept in cash as deposits with the Central Bank or in the form of securities to secure liabilities.
Requirements
Today, in almost all countries with a market economy, the norm of required reserves of the bank is introduced. The effectiveness of this instrument of financial and credit regulation is confirmed by both fundamental research and international practice. In the Russian Federation, the minimum requirements also act as a source of repayment of obligations to creditors and depositors in the event of revocation of the organization’s license to conduct operations. In practice, the return of funds that make up 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 to stabilize the circulation of money and in the fight against inflation. This tool acts as a limiter to the growth rate of cash stock and regulation of 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 tool provides regulation of the total liquidity of the banking structure of the Russian Federation. The control of cash is carried out by reducing the money multiplier.
the main goal
In the practice of financial institutions, there is always a risk of unplanned losses. No institution is 100% insured against them. In this regard, during the functioning and in the process of risk management, each financial institution needs to ensure the formation of bank reserves. To guarantee its reliability, the organization is obliged to create various funds, the funds from which will be used to cover probable losses. The procedure in accordance with which the formation and their subsequent use is carried out is in most cases established by legislative acts and the Central Bank. The amount of deductions from profit before taxation is regulated by the Federal Law on Taxes. The minimum amount of bank reserves is set by the Central Bank. As practice shows, the use of “stock” is appropriate if there is an objective need to reduce the money supply in circulation (to suspend or control growth) in order to prevent the economy from overheating if, to achieve this, the credit facilities of financial institutions are used to be limited by taking a certain share of borrowed funds from them funds (or increase this part). It follows from this that the Bank of Russia reserve is funds of financial institutions that accumulate as unlimited deposits, which should be excluded from any turnover.
Classification
Bank reserves, in general, have one purpose - to compensate for probable expenses or losses if necessary. However, they are divided into species. So, 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 control of funds by reducing cash accumulation in commercial banks. This mechanism limits the credit opportunities of financial companies and maintains a certain amount of money in circulation. At its core, required reserves are funds that commercial banks must keep with the Central Bank. They act as a guarantee financial fund, providing reliability in the performance of obligations to their customers. Such reserves of banks are created not so much in the interests of the organization itself. They act as an instrument of state monetary policy. Being highly liquid, these assets cannot be fully utilized by financial institutions in the event of adverse circumstances. For example, if an outflow of investor funds began in an institution, the reserve can be used exclusively within the framework of the established standard.
Fund
It is presented as part of equity formed by annual deductions from profits. A reserve fund is required to cover losses arising in the course of a financial institution. It is also created to increase the share capital. The deduction rate is determined at the general meeting of shareholders. The value may be any within the established size of the authorized capital. A financial company is entitled to transfer funds to the reserve fund only when there is profit. Its replenishment, thus, is carried out due to an increase in the net asset. The fund accumulates funds received by a financial institution in the course of its activities. Carrying out 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.
Reserves of banks for probable losses on loans
Their creation is caused by credit risks that may arise in the process of activity. Such reserves can prevent fluctuations in profits when writing off losses on loans. Thus, the impact on the amount of capital. The formation of such reserves comes from deductions that are expensed on each loan. These funds are used only to cover outstanding debt under the primary obligation. Due to these reserves, losses are written off on loans that are not feasible for recovery. With a lack of funds, debt recognized as unrealistic or uncollectible is included in the losses of the reporting period. Due to this, the tax base of a financial institution is reduced.
Impairment of securities
Every month on the last business day, revaluation of investments in shares is carried out at market value. The latter should be understood as the weighted average price of one security for transactions that were completed during the last day on the stock exchange or with the help of a trade organizer. In some cases, the actual purchase price of a security on the last business date, halved, may be taken as the market value. If it is below the book price, the financial institution must create an allowance for impairment. Its value should not be more than 50% of the indicated value. Formation is carried out on the last working date of the month in which the security was purchased. Its cancellation is carried out simultaneously with the disposal of the stock. The creation of these reserves, as was said above, is carried out separately for each paper, regardless of the increase or preservation of their total value.
The nature of the depreciation reserve
When revaluing investments, it becomes necessary to form reserves. However, the book value of the securities remains unchanged. In this regard, these funds are rather considered not so much a reserve as act as adjustments to the price of shares for accounting. At the end of the reporting month, credit institutions must reassess the previously created stocks for the depreciation of investments, taking into account the market value and number of securities.
Other types
In addition to the above, there are other reserves of banks. They are combined into a group of probable losses for other assets. To them, in particular, include reserves:
- Under balance sheet assets with risk of losses.
- For a number of instruments recognized in off-balance sheet accounts.
- For derivatives transactions.
- For other losses.
Loss classification
Under the possible losses of a financial organization that determine the formation of reserves, we should understand the hypothetical risks in the coming periods associated with the occurrence of the following circumstances:
- An increase in expenses or liabilities compared to those previously reflected in accounting.
- Decrease in the value of assets of a credit company.
- Failure to fulfill obligations assumed by counterparties of a financial institution for transactions (transactions) or due to failure to fulfill a promise of entities whose proper repayment of debts is ensured by a servicing banking organization.
Of the above banking reserves, only the fund is considered the most effective. This is due to the fact that due to the funds forming it, a financial institution can control its costs. All other bank reserves are not considered as effective. This is because an increase in their size will not contribute to strengthening the organization’s ability to withstand emerging adverse circumstances.
Gold and foreign currency reserves of the bank
They are financial assets with high liquidity. Gold and foreign exchange reserves are managed by the Central Bank and the Ministry of Finance. They include:
- Monetary gold.
- Special right of borrowing.
- Reserve position in the World WF.
- Foreign currency.
The value of these inventories is presented at the reporting date in terms of the US dollar.
Appointment
Gold and foreign exchange reserves act as a financial reserve, due to which, if necessary, payments of state debt or budget expenditures can be made. 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 stock should to a large extent cover the volume of the mass of money in circulation, provide both private and sovereign payments on external debt and guarantee a 3-month import. If such a value of gold and foreign exchange reserves is reached, the Central Bank will be able to effectively control the movement of the ruble exchange rate and interest rates.