Lagged Reserves Definition
What are staggered reserves?
Lagged reserves are a method for calculating the required level of bank reserves on hand or with a Federal Reserve Bank. The amount of the reserve requirement is based on the value of the bank’s assets submission of the application accounts for the previous two weeks.
Key points to remember
- Lagged reserves refer to a method banks use to calculate the minimum reserves they are required to hold by the Federal Reserve.
- In lagged reserve calculations, a bank’s minimum reserve requirements are based on their deposits two weeks prior.
- However, since March 2020, banks are not required by the Fed to hold a minimum reserve-to-deposit ratio.
Understanding Offset Reserves
Reserves represent the amount of cash that banks must keep in the form of paper notes in their safes or in the nearest account. Federal Reserve Bank to guarantee the deposits made by their clients. Since banks operate on a fractional reserve system, no bank will retain enough cash to cover deposits if all of a bank’s customers withdraw their money at the same time.
Indeed, most money never exists in physical form, as the Federal Reserve notes. Instead, money is created as journal entries in a bank’s accounts when it is lent to borrowers and then distributed through the economy. Banks must hold enough physical cash (or their own cash deposits at the Fed) to pay their immediate debts, including withdrawals from customer deposit accounts and payments on other debts. Otherwise, banks risk defaulting on their commitments to other banks or being shut down by the Federal Deposit Insurance Company in case of bank rush.
Minimum reserve requirements are set by the Fed’s Board of Governors as one of its primary monetary policy tools. Since March 2020, the Fed has set minimum bank reserves at zero percent.
In order to verify that banks have sufficient reserves to meet minimum requirements, the Fed needs a rule to calculate the total size of a bank’s deposits. These total deposits can fluctuate significantly from day to day or even within a single business day. The lagged reserve system requires that a bank’s foreign exchange reserves held with the Federal Reserve be linked to the value of its demand deposit (checking) accounts from two weeks earlier.
For example, if a bank’s demand deposits were $500 million on a given date and its reserve requirements were 10%, its foreign exchange reserves two weeks later should be $50 million. . This two-week lag gives banks enough time to ensure that they have the necessary reserves (on a given day) to cover the reserve requirements for deposits (two weeks before).
Shift Reserve History
Prior to 1968, the Federal Reserve required banks to calculate required reserves each week based on their deposits during the same week. The lagged reserve calculation was used from 1968 until 1984, when the contemporary calculations were reimplemented. But the Fed returned to the lagged calculation in 1998, to make it easier for banks to estimate and plan the amount of reserves they should hold.
In March 2020, the Fed reduced all reserve requirement ratios to zero, eliminating the need to calculate minimum reserve requirements.The move was part of accommodative monetary policy measures in response to the economic impact of the COVID-19 outbreak and subsequent lockdowns.