Excess Reserves Article byVishal Garg What are Excess Reserves?

Excess Reserves refers to the amount kept or deposited with the principal or central regulatory authority (in India, Reserve Bank of India) over and above the statutory requirements. If reserves are positive, then it simply means that the bank has kept the amount in reserves more than the statutory requirement and vice versa. In the case of zero value, it means there is no deficit or surplus reserves balance kept.

Sometimes it is seen that the regulating bank pays interest on the amount extra deposited in the reserve account to encourage the banks to deposit their extra cash balance in the reserve account as it is very necessary for the overall growth of the economy to properly maintain the cash and funds of the economy.

Excess Reserves Formula

Excess Reserves Formula = Legal Reserves (Amount Deposited) – Reserves Required

Follow below given steps to calculate excess reserve.

1. Calculate the amount required to be maintained as per statutory requirements (). To calculate the minimum required to be maintained, the use of the below-given formula gives us the required results:

Minimum Requirement = Rate of Minimum Requirement * Total amount on which the rate applies

2. Identify the amount kept or maintained by the bank in the reserves account with statutory authority (legal reserve). Take a sum total of all amounts deposited during the year in the reserve account maintained with the regulatory authority.

3. Calculate the difference between legal reserves calculated in step 2 above and reserves required computed in step 1 above. Mathematically represented as:

Excess Reserves = Legal Reserves (Amount Deposited) – Reserves Required

For eg:
Source: Excess Reserves (wallstreetmojo.com)

Examples

You can download this Excess Reserves Formula Excel Template here – Excess Reserves Formula Excel Template

Example #1

The statutory guidelines for the bank are: Bank should maintain all the time a minimum of 20(twenty) per cent of their demand deposits with central regulating authority (let us say ABC Bank). Now, Bank P has demand deposits of \$50,000,000 and has maintained \$11,000,000 with ABC Bank. Now, by applying the above steps, we can compute Excess Reserves as follows:

Solution

Given:

• Legal Reserves = \$11,000,000
• Minimum reserve percentage = 20% of demand deposits
• = \$50,000,000

Calculation of Reserves Required

• =50000000*20%
• Reserves Required =10000000

Calculation of the excess reserves can be done as follow –

• =11000000 – 10000000

Example #2

The reserves bank should maintain all the time is 150 per cent of its deposits. Bank PQR has deposited \$35000 in reserves account and has total deposits of \$75000. The rate of interest given by the regulatory bank on extra deposits is 3% per anum. We have to find out from the below-given options, which option is the correct one in regards to interest earned on excess reserves: a) \$470 b) \$675  c) \$815  d) \$715.

Solution

Given:

• Legal Reserves = \$1000
• Minimum reserve percentage = 150% of deposits
• Deposits = \$500

Calculation of Reserves Required

Statutory Requirement (Reserves Required) = Demand Deposits * 20%

• =500*150%
• = 750
• =1000 – 750

Example #3

The reserves bank should maintain all the time is 150 per cent of its deposits. Bank PQR has deposited \$35000 in reserves account and has total deposits of \$75000. The rate of interest given by the regulatory bank on extra deposits is 3% per anum. We have to find out from the below-given options, which option is the correct one in regards to interest earned on excess reserves: a) \$470 b) \$675  c) \$815  d) \$715.

Solution

Given:

• Legal Reserves = \$75000
• Minimum reserve percentage = 150% of deposits
• Deposits = \$35000

Calculation of Reserves Required

Statutory Requirement (Reserves Required) = Demand Deposits * 20%

• = \$3500*150%
• = \$52500

Calculation of the excess reserves can be done as follow –

• = \$75000 – \$52500

Interest Income on Extra Deposits

Interest Income on Extra Deposits = Excess Reserves * Rate of Interest.

• = \$22500*3%
• = \$675

Relevance and Use

• Those banks who have maintained excess reserves are more secure in the events of sudden loss or in a situation of heavy cash demand.
• They resolve the issues of the bank in the situation when there is a shortage in the supply of cash.
• In the situation where the bank has a lot of cash balance with themselves, then they may deposit the same with the regulatory bank and can earn interest thereupon if the same is above the minimum requirement. For example, if Bank A is required to maintain \$500 as minimum reserves and they have deposited \$750 in the reserve account, then the statutory bank pays them interest on excess \$250 for the period they were deposited.

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