In the United States, borrowed reserves have to do with the amount of funds that are extended upon request to the Federal Reserve Bank system by the federal government. The purpose of the borrowed reserve is to allow any banks that are classified as member banks of the Federal Reserve system to maintain the reserve requirement that is necessary in order to operate.
A reserve requirement is simply the amount of funds and assets that is required for a bank to hold in cash or on deposit in order to be recognized by the Federal Reserve System. In most cases, the amount of the requirement is calculated based on a percentage of the demand deposits and time deposits that are in the possession of the bank. In some areas, the reserve requirement is referred to as a reserve ratio. Borrowed reserves are made available to ensure that member banks are able to secure assistance in meeting the reserve ratio, regardless of current economic conditions.
Because the extension of borrowed reserves is provided by the Fed and funneled through the system of Federal Reserve Banks that are in operation around the country, member banks have to make application through a process of channels in order to request a reserve amount. The reason for the request may vary from one situation to the next, and is often simply to allow the member bank to meet a temporary set of circumstances and still manage to retain the minimum amount of reserves on hand to be in compliance with banking laws.
The federal government sets the requirements for the application and extension of borrowed reserves, as well as defines the process that must be followed in order to submit the application. From time to time, changes are made in the process, with grace periods extended to allow all member banks time to adjust their internal procedures to allow for the revisions. As a general rule, there is usually not a great deal of problem in a member bank obtaining borrowed reserves, as long as the documents are in proper order, and the member bank fully complies with the terms and conditions inherent in the borrowed reserve agreement.
