Excess Reserves

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 (reserves requiredReserves RequiredReserve Requirement is the minimum liquid cash amount in a proportion of its total deposit that is required to be kept either in the bank or deposited in the central bank, in such a way that the bank cannot access it for any business or economic activity.read more). 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

Excess-Reserves-Formula

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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
  • Demand Deposits = $50,000,000
Excess Reserves Formula Example 1

Calculation of Reserves Required

Excess Reserves Formula Example 1.1

Statutory RequirementStatutory RequirementA statutory reserve is the minimum limit of funds, net profits, readily marketable securities and other assets that the insurance companies need to keep aside as specified under the state insurance regulations for maintaining liquidity and settling the insurance claims.read more (Reserves Required) = Demand Deposits * 20%

  • =50000000*20%
  • Reserves Required =10000000

Calculation of the excess reserves can be done as follow –

Example 1.2
  • =11000000 – 10000000
Excess Reserves Formula Example 1.3

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
Excess Reserves Formula Example 2

Calculation of Reserves Required

Example 2.1

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

  • =500*150%
  • = 750
Excess Reserves Formula Example 2.2
  • =1000 – 750
Example 2.3

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
Example 3

Calculation of Reserves Required

Excess Reserves Formula Example 3.1

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

  • = $3500*150%
  • = $52500

Calculation of the excess reserves can be done as follow –

Example 3.2
  • = $75000 – $52500
Excess Reserves Formula Example 3.3

Interest Income on Extra Deposits

Excess Reserves Formula Example 3.4

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

  • = $22500*3%
  • = $675

Relevance and Use

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