Why Do Central Banks Require Reserves?

“Over 90% of central banks oblige depository institutions(commercial banks) to hold minimum reserves against their liabilities, predominantly in the form of balances at the central bank. The role of these reserve requirements has evolved significantly over time. The overlay of changing purposes and practices has the result that it is not always fully clear what the current purpose of reserve requirements is, and this necessarily complicates thinking about how a reserve regime should be structured…..”

The IMF has produced a timely background paper that describes the three main purposes for reserve requirements – prudential, monetary control and liquidity management – and suggests best practice for the structure of a reserves regime. As well as discussing the use of reserves remuneration as a policy signal, the paper illustrates current practices using a 2010 IMF survey of 121 central banks.

Central Bank Balances and Reserve Requirements, IMF Working Paper, February 2011