Contemporaneous Reserves

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. 



comments powered by Disqus
Hot Definitions
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
  2. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  3. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  4. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  5. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  6. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
Trading Center