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. Accident Year Experience

    Premiums earned and losses incurred during a specific period ...
  4. Book Value Reduction

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

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

    The risk posed by an error or omission in a financial statement ...
Related Articles
  1. Investing

    What are the generally accepted accounting principles for inventory reserves?

    As with most matters related to generally accepted accounting principles (GAAP), accountants assigned with the task of applying GAAP to inventory reserves often use a significant amount of personal ...
  2. Personal Finance

    How The Federal Reserve Manages Money Supply

    Find out how the Fed manages bank reserves and this contributes to a stable economy.
  3. Forex

    How do central banks acquire currency reserves and how much are they required to hold?

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign exchange reserves. Reserve currencies usually also become the international ...
  4. Fundamental Analysis

    What is the difference between a capital gearing ratio and a net gearing ratio?

    Understand the definition of gearing in the finance industry, the difference between net gearing and capital gearing ratios and how they are interpreted.
  5. Investing Basics

    What is the difference between the gearing ratio and the debt-to-equity ratio?

    Dive deeper into gearing ratios: what are they, how are they used and why the debt to equity ratio is one of the most popular analytical gearing tools.
  6. Fundamental Analysis

    What is the difference between interest coverage ratio and DSCR?

    Understand the basics of the interest coverage ratio and the debt-service coverage ratio, including calculations and how each type reflects financial stability.
  7. Investing Basics

    What is the difference between interest coverage ratio and TIE?

    Read about the times interest earned, also known as the interest coverage ratio. Find out why this is an important ratio for investors and creditors.
  8. Investing Basics

    What is accrual accounting used for in finance?

    Read about the accrual method of accounting, its uses and rules, and why it is considered so important for investors, lenders and managers.
  9. Investing Basics

    What is the difference between accrual accounting and cash accounting?

    Understand the differences between the two basic methods of accounting commonly used by businesses: cash accounting and accrual accounting.
  10. Investing Basics

    When are expenses and revenues counted in accrual accounting?

    Take an in-depth look at the treatment of revenues and expenses within the accrual method of accounting and learn why many consider it superior to cash accounting.

You May Also Like

Hot Definitions
  1. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  2. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  3. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  4. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  5. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  6. Law Of Supply And Demand

    A theory explaining the interaction between the supply of a resource and the demand for that resource. The law of supply ...
Trading Center