Contemporaneous Reserves

AAA

DEFINITION of 'Contemporaneous Reserves'

A form of bank reserve accounting that requires a bank to maintain enough reserves to cover all deposits made that week. The use of contemporaneous reserves accounting is designed to reduce short-term monetary fluctuations. The Federal Reserve required banks to use contemporaneous reserve accounting between 1984 and 1998.

INVESTOPEDIA EXPLAINS 'Contemporaneous Reserves'

Contemporaneous reserves are difficult for banks to calculate because they cannot be sure of the amount of deposits they will receive throughout the week. This forces banks to estimate the amount of deposits, which creates the risk of forecasting incorrectly.

The creation of the requirement was in response to pressures on the money supply, which some economists believed was caused by the lagged reserve accounting method that banks were using at the time. The lagged reserve requirements allowed banks to estimate reserves based on deposits from two weeks prior. Economists speculated that banks were creating deposits and loans with insufficient funding, and that banks felt confident making these moves because they knew the Federal Reserve would lend money at the discount window if they got into trouble.

Despite enacting the contemporaneous reserves requirement, banks were still running into trouble making estimates, and money supply indicators such as M1 and M2 kept fluctuating. 

RELATED TERMS
  1. Money Supply

    The entire stock of currency and other liquid instruments in ...
  2. Reserve Requirements

    Requirements regarding the amount of funds that banks must hold ...
  3. Book Value Reduction

    Reducing the value at which an asset is carried on the books ...
  4. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  5. Inherent Risk

    The risk posed by an error or omission in a financial statement ...
  6. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
Related Articles
  1. What are the generally accepted accounting ...
    Investing

    What are the generally accepted accounting ...

  2. How The Federal Reserve Manages Money ...
    Personal Finance

    How The Federal Reserve Manages Money ...

  3. How do central banks acquire currency ...
    Forex

    How do central banks acquire currency ...

  4. How Is Europe Affecting The Martkets?
    Economics

    How Is Europe Affecting The Martkets?

Hot Definitions
  1. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  2. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  5. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  6. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
Trading Center