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).

  1. Bank Reserve

    A bank reserve is the currency deposit that is not lent out to ...
  2. Reserve Requirements

    Reserve requirements refer to the amount of cash that banks must ...
  3. Fractional Reserve Banking

    Fractional reserve banking is a system in which only a fraction ...
  4. Reserve Maintenance Period

    The reserve maintenance period is the time frame in which banks ...
  5. Primary Reserves

    Primary reserves are the minimum amount of cash under U.S. federal ...
  6. Net Free Reserves

    Net Free Reserves was a statistic released in weekly Federal ...
Related Articles
  1. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Here's more information about how banks don't need your money to make loans, but they do want it to make those loans more profitable.
  2. Personal Finance

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  3. Investing

    How the Federal Reserve Devises Monetary Policy

    Learn about the tools the Federal Reserve uses to influence interest rates and economic conditions. Find out the types of action a central bank may take.
  4. Investing

    How Citigroup Makes its Money

    As a business, Citi has everything going for it: scale, operational breadth, and the ear of key policymakers.
  5. Insights

    A Primer On Reserve Currencies

    For nearly a century, the U.S. dollar has served as the world's premier reserve currency, but the future is uncertain.
  6. Investing

    Introduction to the Chinese Banking System

    China's banking system continues to evolve as it steps into a greater role in the global economic system.
  1. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
  2. Why do commercial banks borrow from the Federal Reserve?

    Commercial banks borrow from the Federal Reserve primarily to meet reserve requirements when their cash on hand is low before ... Read Answer >>
  3. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
  4. What factors are the primary drivers of banks' share prices?

    Bank share prices are driven by the same forces as any other shares including market sentiment, expectations about the future ... Read Answer >>
  5. How Central Banks Influence Money Supply

    Central banks use several different methods to increase (or decrease) the amount of money in the banking system. Learn more ... Read Answer >>
Trading Center