What Is a Reservable Deposit?
A reservable deposit is any bank deposit that is subject to reserve requirements imposed by the Federal Reserve Bank in the United States. Reservable deposits include transaction accounts, savings accounts and nonpersonal time deposits. Transaction accounts are deposit accounts that are readily available to the account owner, such as a checking account or share draft account, and may be accessed through cash withdrawals, the use of debit cards or checks or with electronic transfers.
Transaction accounts are used by both individuals and institutions. Nonpersonal time deposits are accounts owned by institutions, not an individual(s), that pay an interest rate and have a specified maturity date before which the depositor must pay a fee to withdraw funds. An example of a nonpersonal time deposit account is a certificate of deposit owned by a corporation.
Understanding Reservable Deposit
The Federal Reserve Bank's Board of Governors determines the reserve requirement rate, which is imposed on the total value of a depository institution's reservable deposits. If account holders increase the amount of money held in their reservable deposit accounts, the depository institution's reserve requirement will increase. The amount of this reserve requirement must be held either as cash in an institution's own vault or as a deposit at the nearest Federal Reserve bank. This practice is known as fractional reserve banking because only a fraction of customer deposits are kept on hand for immediate withdrawal. The remaining value of customer deposits is loaned out so the bank can earn a return on it.
Many depository institutions make use of sweep accounts. Sweep accounts are non-reservable deposit accounts, such as money market funds, that generally earn a higher interest rate than reservable deposit accounts. Depository institutions may analyze reservable deposit accounts to determine if there are excess funds that can be moved out of the account, and will automatically transfer these funds, sometimes as often as daily, to a sweep account like a money market fund, which is not subject to federal reserve requirements. By utilizing sweep accounts, the depository institution lowers the amount of money it must hold in cash to meet reserve requirements, thereby increasing the amount of money it can lend out or invest to earn an interest rate or higher rate of return.