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.
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