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Bank reserves

May 3, 2014
7:58 am

infinitecardinal

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May 3, 2014

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This may be off topic, but I can't find an answer anywhere. If you know of a better place for me to post this question, please let me know.

I hear that banks keep their "reserves" at central banks. Does this apply in Canada? The Bank of Canada controls the overnight borrowing rate between banks, but this is done through the banks' "settlement accounts", which are used to settle their debts with each other at the end of each day. Are these settlement accounts the same as the banks' reserve accounts at the central bank?

I know that reserve requirements were eliminated in Canada in the early 90s. Does that mean that the banks don't have to keep their reserves at the Bank of Canada? If not, what do they do with them?

Thanks.

May 3, 2014
12:10 pm

Norman1

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Canadian banks no longer have any reserve requirements. This is from page 14 of Bank of Canada Technical report #81: The Canadian Banking System written by former Deputy Governor Charles Freedman in 1998:

The 1992 legislation [the 1992 amendments to the Bank Act] also addressed the competitive equity of imposing non-interest-bearing reserve requirements on banks and not on other deposit-taking institutions. Thus, it was decided to phase out the reserve requirements on the banks over two years to remove the unequal treatment of institutions competing for the same business.

I suspect the banks withdrew their reserve deposits with the Bank of Canada over the two years and used the money in their business.

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