DEFINITION of 'Non-Borrowed Reserves'

Non-borrowed reserves are bank reserves that are not borrowed from the central bank.

BREAKING DOWN 'Non-Borrowed Reserves'

Under the fractional reserve banking system, depository institutions lend out most of the deposits they receive from customers. In order to increase financial stability – discouraging bank runs, for example – central banks impose reserve requirements, forcing these institutions to keep a certain portion of their funds either as vault cash or in accounts at the central bank.

To satisfy these reserve requirements, banks can borrow from the central bank. The Federal Reserve offers overnight loans to commercial banks at the discount rate. Reserves that are not borrowed in this way are non-borrowed reserves.

In practice the vast majority of reserves in the U.S. are non-borrowed, since discount window borrowing is relatively expensive and carries a stigma. Since the financial crisis, the Fed has paid interest on excess reserves – reserves that exceed the requirement. Combined with a near-zero federal funds rate, that policy drove the level of excess reserves to unprecedented levels, meaning that few institutions had a need to borrow to make up a shortfall.

 

RELATED TERMS
  1. Free Reserves

    Free reserves are the reserves a bank holds in excess of required ...
  2. Reservable Deposit

    A reservable deposit is a deposit subject to reserve requirements, ...
  3. Excess Reserves

    Excess reserves are capital reserves held by a bank or financial ...
  4. Fractional Reserve Banking

    Fractional reserve banking is a system in which only a fraction ...
  5. Wednesday Scramble

    Last-minute buying and selling of eligible reserves that takes ...
  6. Federal Reserve Credit

    Federal Reserve Credit refers to the Federal Reserve lending ...
Related Articles
  1. Insights

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  2. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  3. Insights

    How the Federal Reserve Manages Money Supply

    Find out how the Federal Reserve manages bank reserves and how this contributes to a stable economy.
  4. Insights

    How Central Banks Control the Supply of Money

    A look at the ways central banks pump or drain money from the economy to keep it healthy.
  5. Personal Finance

    How the Federal Reserve Affects Your Mortgage

    The Federal Reserve can impact the cost of funds for banks and consequently for mortgage borrowers when maintaining economic stability.
  6. Trading

    Emerging Market FX Currency Reserves Growing

    Are emerging markets preparing for a period of volatility?
  7. Investing

    How Does Reserve Work and Make Money?

    Learn what Reserve is and how it makes money through securing reservations at fine dining establishments for clients willing to pay for its premium service.
  8. Trading

    How Inflation-Fighting Techniques Affect The Currency Market

    Central banks use these strategies to calm inflation, but they can also provide longer-term clues for forex traders.
RELATED FAQS
  1. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
  2. What happens if the Federal Reserve lowers the reserve ratio?

    Learn about the Federal Reserve's monetary policy and the tools it uses to control it. Understand what happens if the Federal ... Read Answer >>
  3. What's the difference between the prime rate and the discount rate?

    Learn more about the prime rate and the discount rate and how the Federal Reserve uses these rates in the U.S. economy. Explore ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center