LeoGlossary: Reserves

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Reserves refer to funds that a company or organization sets aside from its profits or earnings to strengthen its financial position and prepare for future needs. There are several main types of reserves:

  1. Legal Reserves: Funds that companies are legally required to set aside, often a percentage of profits, to protect shareholders and creditors.
  1. Capital Reserves: Funds created from capital profits, not regular business operations, that can be used for specific purposes like asset purchases or covering capital losses.
  1. Revenue Reserves: Funds from operational profits that can be used for dividends, expansion, or as a financial safeguard.
  1. Secret Reserves: Undisclosed reserves that companies can use to discreetly strengthen their financial position, though this practice has some drawbacks.

Within these main types, there are also general reserves for broader financial stability, and specific reserves set aside for designated purposes like asset replacement or debt repayment.

Reserves play a crucial role in ensuring a company's long-term financial health and ability to weather uncertainties. They provide a buffer against losses, fund growth initiatives, and enhance credibility with stakeholders.

Central Bank Reserves

Central bank reserves refer to the cash holdings and deposits that commercial banks maintain with the central bank. The main types of central bank reserves are:

  1. Required Reserves: The minimum amount of reserves that commercial banks must hold, as determined by the central bank's reserve requirements.
  1. Excess reserves: Any reserves held by commercial banks beyond the required minimum. These can be used as a buffer against unexpected withdrawals.
  1. Borrowed Reserves: Reserves that commercial banks have obtained by borrowing from the central bank, typically through the discount window.
  1. Non-Borrowed Reserves: Reserves that commercial banks have not obtained by borrowing from the central bank.

Central banks use reserve requirements to influence the money supply and liquidity in the banking system. Reserves also allow commercial banks to facilitate payments and withdrawals, and provide a buffer against financial shocks.

The size and composition of a central bank's reserves are important indicators of its monetary policy stance and the overall health of the financial system. Central banks carefully manage their reserves to achieve their policy objectives while maintaining financial stability.

Non-Financial Reserves

Non-financial reserves refer to assets that are not in the form of cash or financial instruments, but rather physical resources and commodities. The main types of non-financial reserves include:

  1. Mineral and Energy Reserves: Reserves of natural resources like oil, gas, coal, and minerals that a country or company holds for future use or extraction.
  1. Biological Reserves: Reserves of living resources like forests, fisheries, and agricultural land that can provide sustainable yields over time.
  1. Water Reserves: Reserves of freshwater resources, both surface and groundwater, that a country or region maintains for domestic, agricultural, and industrial use.
  1. Land Reserves: Reserves of land, including undeveloped or protected areas, that a government or organization holds for future development, conservation, or other strategic purposes.

These non-financial reserves represent a country or organization's stock of natural capital and productive assets, which are crucial for long-term economic sustainability and security. They provide a buffer against resource scarcity, price volatility, and supply chain disruptions.

Proper management and accounting of these non-financial reserves is important for effective resource planning, environmental protection, and intergenerational equity.


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