What are reserve requirements?
Reserve requirement – is the cash deposited by banks on special accounts and/or maintained on correspondent accounts opened with the Central Bank, averaged over the required reserves, which are calculated on the basis of the averaging ratio.
Averaging ratio – is a ratio between 0 and 1 used to determine the average amount of mandatory reserves required to be held in a correspondent account with the Central Bank over a specified holding period.
Commercial banks form reserves exclusively in the national currency, regardless of the currency of the liabilities.
The holding period for the reserve requirement is 28 or 35 calendar days, starting on Thursday and ending on Wednesday.
Reserve requirements have the following functions:
- effective bank liquidity management;
- reduction of short-term volatility of interest rates in the money market through the use of an averaging ratio;
- reduction of dollarization in the banking system through the use of differentiated standards.