What is a 'Reserve City Bank'

A reserve city bank is a bank in the U.S. that is located in certain designated cities, required to keep higher reserve requirements than banks in other locations.

BREAKING DOWN 'Reserve City Bank'

Reserve requirements of banks are the amount of funds that they are required by the Federal Reserve to hold in reserve against specified deposit liabilities. Banks and other depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks. The reason for this is to have sufficient reserves on hand to repay depositors on demand. Because at any given time a bank's reserves are less than the amount of its deposits, a bank may be vulnerable to a bank run if there is a loss of confidence. This might happen for either a single bank due to its own situation, or it could be a more generalized loss of confidence in the banking system.

Because there is a concentration of deposits (and deposit-holders) in major cities, banks in these cities have more stringent reserve requirements to help forestall generalized bank runs. Indeed, the requirement for reserve cities to hold their amounts of reserves than other banks (called country banks) pre-dated the formation of the Fed, and was intended to strengthen the banking system in a time that was subject to repeated bank runs and bank failures.

The mandate for reserve cities to hold higher reserves was enshrined in the National Banking Act of 1863. The formation of the Federal Reserve System in 1913 was in response to a desire for greater national control over the monetary system following recurrent financial crises, which had continued to occur despite the safeguards introduced by the National Banking Act. Part of the reason for the recurrent crises was that part of what counted as a bank's reserves was a reserve held at a different bank — meaning the same dollar could effectively be counted twice (or even more) as reserves, and actually increase the possibility of contagion between banks (and absent a central bank, there was no lender of last resort). The Fed maintained the system in which reserve city banks were required to hold higher reserves than country banks, but rather than holding reserves at each other, reserves now either had to be held as either vault cash or deposits at the Fed itself (through one of the regional Federal Reserve banks).

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