What is the 'Reserve Maintenance Period'

The reserve maintenance period is the time frame in which banks and other depository institutions must maintain a specified level of funds. It is a two-week period that begins on a Thursday and ends on a Wednesday. An assessment of overdrafts and corresponding charges also occurs during this time period.

Because the specified amount of reserve funds changes regularly, it is important for the institution to have an account at a reserve bank or a subsequent pass-through arrangement, in order to ensure that the appropriate funds are available. Vault cash can also be counted toward the reserve requirements for a given reserve maintenance period, but a pass-through arrangement or reserve bank balance is typically used to make up the shortfall between a bank’s available vault cash and its reserve requirement.

BREAKING DOWN 'Reserve Maintenance Period'

In a pass-through arrangement, a bank satisfies its reserve requirement for a given reserve maintenance period by passing its reserve balance through the account of a correspondent bank or credit union. Eligible correspondent banks include National Credit Union Administration Central Liquidity Facilities, Federal Home Loan Banks, depository institutions or banking Edge Act and Agreement corporations with a master account at a Federal Reserve Bank. Otherwise, a bank may meet its reserve requirements by depositing reserve funds in its own Federal Reserve account.

Penalties for Failing to Meet the Reserve Requirements

To calculate whether or not a specific bank has adequate funds in its reserve account or pass-through account to satisfy the reserve requirement, the Federal Reserve uses the average of all the end-of-day balances of that institution's master account throughout the reserve maintenance period. That means that a given bank’s reserve balance can fall below, or exceed, the requirement threshold on a given day without necessarily incurring a penalty. Institutions can make up for shortfalls by maintaining a higher balance on other days in the reserve maintenance period.

A penalty-free band exists that is equal to the reserve balance requirement, plus or minus a specific dollar amount. For banks and depository institutions that maintain their reserve balances directly with the Federal Reserve, the top and bottom thresholds of this band is $50,000 or 10 percent of the institution’s reserve balance requirement, whichever amount is greater. The institution must maintain an average balance greater than or equal to the bottom of this penalty-free band in order to fulfill its requirements in any given reserve maintenance period.

RELATED TERMS
  1. Reserve Requirements

    Reserve requirements refer to the amount of cash that banks must ...
  2. Bank Reserve

    A bank reserve is the currency deposit that is not lent out to ...
  3. Wednesday Scramble

    The Wednesday scramble consists of last-minute borrowing by banks ...
  4. Cash Reserves

    Cash reserves refer to the money a company or individual keeps ...
  5. Net Free Reserves

    Net Free Reserves was a statistic released in weekly Federal ...
  6. Fractional Reserve Banking

    Fractional reserve banking is a system in which only a fraction ...
Related Articles
  1. 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.
  2. 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.
  3. 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.
  4. Insights

    Understanding How the Federal Reserve Creates Money

    Read about how the Federal Reserve actually targets and creates new money in the economy, and find out why the savings and loans system magnifies this process.
  5. Personal Finance

    What is Fractional Reserve Banking?

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

    What's the Salary of the Chairman of the Federal Reserve?

    The chairman of the Federal Reserve oversees the U.S. banking system.
  7. Investing

    Do Countries With The Most Oil Reserves Actually Produce The Most Oil?

    Oil, aka Black Gold, is so precious that wars have erupted over it. So why is it that not all oil-rich nations are money-rich nations?
  8. 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.
RELATED FAQS
  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. What happens if the Federal Reserve lowers the reserve ratio?

    If the Federal Reserve decides to lower the reserve ratio through an expansionary monetary policy, commercial banks are required ... Read Answer >>
  3. 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 >>
  4. What is the difference between initial margin and maintenance margin?

    Learn the difference between an initial margin requirement and a maintenance margin requirement and how these affect an investor's ... Read Answer >>
  5. Why do some people claim the Federal Reserve is unconstitutional?

    Learn why some people believe it was unconstitutional for the government to establish the Federal Reserve Bank and why they ... Read Answer >>
Trading Center