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Money and credit - Ivanov V.M.

25.7. Regulation of reserve requirements

Carrying out a policy of required reserves is one of the tools actively used by the NBU to monitor the activities of commercial banks and implement monetary regulation. Mandatory reserves are interest-free deposits of commercial banks in the NBU, the amount of which is established in a certain ratio to bank liabilities.

Requirements for reserves can apply either to all bank deposits (deposits) and liabilities received from other sources, or only to certain types of bank liabilities.

The amount of required reserves is established in accordance with the Law of Ukraine "On Banks and Banking Activities".

The law defines the NBU’s right to independently establish the norms (rates) of required reserves and the types of bank liabilities to which they apply. In countries with developed market economies, for example, in the USA and Germany, the maximum reserve requirements and types of bank liabilities for which reserve formation is required are provided for in special legislative acts and are not the prerogative of the central bank. Within the framework of legislatively established boundaries and depending on the economic situation, central banks may establish different reserve standards.

Experience in the development of state regulation of the banking system in countries with market economies shows that at first the use by central banks of the instrument of required (minimum) reserves was aimed at providing customers' deposits in commercial banks with liquid reserves and thus protect the interests of depositors.

In modern conditions, the policy of required reserves pursued by central banks has a dual purpose:

• supports the sustainable liquidity of commercial banks;

• is an instrument for regulating the money supply.

The use of the required reserves mechanism allows the central bank to directly influence the amount of money held by commercial banks. An increase in interest rates on mandatory reserves increases the size of interest-free deposits of commercial banks in the central bank, which directly reduces the size of deposits and other borrowed funds that commercial banks can use to provide loans. At the same time, regardless of the size of required reserves, banks are obliged to pay interest on all deposits.

Commercial banks and their branches keep required reserves in correspondent (subcorrespondent) accounts opened in settlement and cash centers of the NBU. Their task is to maintain the balance of funds on the correspondent account (subaccount) not lower than the standard amount of required reserves. The amount of the balance of funds in excess of the standard amount of required reserves forms the secondary reserves of a commercial bank.

Since September 1998, commercial banks have been calculating the normative (obligatory) amount of reserves on a daily basis and the same requirements are imposed on the observance of reserve requirements. The reserve ratio changes depending on the objectives of the monetary policy and in recent years fluctuates at the level of 11-16.5%.