What Are Primary Reserves?
Primary reserves are the assets that a bank has on hand to cover withdrawals, loans, and other activities that require fast or immediate liquidity. This amount also includes money located at a federal reserve and is essentially the minimum amount necessary for a bank to cover accounts and do business. Banks also typically have secondary reserves, which are assets invested in short-term securities and other investments that pay interest and earn revenue for the institution. Primary reserves should not be confused with a primary reserve ratio, which is a comparison of the expendable net assets of an organization and its total expenses.
The term "primary reserves" is used in banking to indicate a certain form of cash and similar assets that can be used as fast, accessible liquidity. This is the minimum amount of money that needs to be on hand or accessible by a bank for it to remain operational, and may be a legally required value in some areas. It includes assets that are at a bank location, as well as money that is in a federal reserve used to insure accounts at that institution. Primary reserves also include checks that have been received but have not yet been collected.
In contrast to primary reserves, secondary reserves are funds that are not immediately accessible to a bank, but which typically create revenue for an organization. This includes assets that have been invested by a bank into secure, typically short-term, bonds or other securities. Unlike primary reserves, these funds are not part of the minimum required assets of an institution, allowing banks to invest this money to earn revenue and profit. Secondary reserves are not typically accessible by a bank, and are not included as a source of liquidity in case there is a run of withdrawals made upon it.
Primary reserves should not be confused with the primary reserve ratio for an organization, which is an indication of how well a business can continue operating without income. This value is determined as a simple fraction in which the numerator, or top number, is the expendable net assets of a company. These assets include funds on-hand as well as money that is not invested long-term and is easily accessible. The denominator, or lower value, of this fraction is the total expenses for an organization, including operating expenses and other costs. This fraction is then turned into a decimal, which represents how well a company is able to pay its expenses based on net assets, without consideration of additional revenue.
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