Reserves of banks: definition, features and formation
No lending institution can fully insure against financial losses. In this regard, while such organizations are functioning, financial institutions should manage banking risks. To this end, they assign a serious role to measures that reduce the likelihood of losses. For this purpose, the required reserves of the bank were created.
For a bank to be considered financially reliable for its customers, it is required by law to create reserves of various types that will be able to cover any losses associated with lending to citizens. In most cases, the Bank of Russia is responsible for the creation and determination of specific amounts, and this issue is also regulated by legislative acts. This is what forms the required reserves of banks. The Central Bank of the Russian Federation is responsible for determining the minimum reserve of any organization.Deductions to these reserves are made before the amount of taxes on the profit of the organization is calculated, and this is regulated by federal laws.
Types of bank reserves
The amount reserved to cover losses has a specific purpose: it is used in case of urgent need. However, provisions are directly related to expected costs and losses. They are usually divided into different categories. At the same time, the required reserves ratio of the bank is regulated directly by state legislation.
The term reserve requirements refers to an economic instrument designed to regulate the liquidity of a country's banking system. It is used by the Bank of Russia to control financial resources, reducing the cash savings of commercial organizations. Thanks to this mechanism, it is possible to limit the credit possibilities of these companies and settle the money that is in circulation with the population.
Obligatory reserves of central banks are collected in one place financial assets of commercial banks and other companies in this sector, which should be kept in the Central Bank of the country.This is the so-called guarantee cash fund, with the help of which the state ensures the reliability of organizations' transactions with their customers. At the same time, no bank is interested in creating such an instrument - it is completely neutral and fulfills the function of implementing the country's financial and credit policy.
Such reserves are considered to be assets with high liquidity, but at the same time the bank has no right to use them fully if it has difficulties in work or other circumstances that adversely affect its functioning. For example, if an outflow of customer investments appeared in a financial organization, then an organization can use banks' reserves to a limited extent. That is, only that part of them that is permissible in accordance with regulatory acts. Increasing the required reserves for a particular organization will not allow it to become more reliable. This is due to the fact that a change in regulations will entail the withdrawal from the turnover of an additional amount of money.
Bank reserve fund
This concept is commonly understood as part of the company's own funds, which is formed due to the annual deduction of funds from its profits.It is created in order to cover the losses of an organization that arise in connection with its activities, if necessary.
The second purpose of creating a reserve fund is an increase in share capital. To determine the standard of deductions, the general meeting of shareholders of the organization is convened, but they cannot reduce a certain amount of the statutory fund.
When calculating the company's capital, this fund is taken into account. That is, the required reserve ratio of the central bank should be taken into account for this type. The only case where a credit bank can make a payment to this fund is when it has a profit after the working year.
Creating a reserve fund is entirely due to the increase in net assets. Thus, there can get assets acquired by the organization due to its activities. At the time of deduction, a financial institution may use part of its assets solely for specific purposes, and the main one is to cover the losses of the organization.
Provisions for possible loan losses
This concept means a special reserve of the central bank.which is formed in connection with the occurrence of credit risks, and they necessarily arise during the activities of the organization in this area. Due to this, the reserve company prevents fluctuations in the amount of profit of commercial organizations. This result is achieved by writing off money to cover loan losses. Thus, the value of the company's final capital is regulated.
The formation of this reserve is due to deductions that relate to the costs of organizations engaged in banking activities. This takes into account each loan issued separately. Reserves of commercial banks aimed at probable losses from the issuance of a loan can only be used to cover the principal debt of the client, excluding interest. With this reserve, you can write off losses on loans for which customers do not make mandatory payments.
It is worth noting that such debt - if it is deemed hopeless or unreal to be recovered from the client - should be deducted from the bank’s balance sheet at the expense of this very reserve.And if it is not enough to cover the debt, then this amount goes into the number of losses of the reporting year. This, in turn, leads to a decrease in taxation of the commercial, credit organization base. But it is worth considering that, forming such a reserve, the bank cannot use valuable resources.
Bank reserves for securities depreciation
At the end of each reporting period, that is, on the last day of the working month, the securities should be revalued. That is, the estimated market value that the bank has invested in these securities. This case implies that the market price takes into account the price of one security paper, taking into account transactions that were made during the last trading day on the stock exchange or through the trade organizer. These are exceptional cases where the actual price of the paper, divided in two, is taken for the market price.
If this situation occurred, and the security at the time of the last working day of the reporting month was lower than its book price, then the organization must create a certain reserve. It is designed to cover the losses that will arise in connection with the depreciation of the security.In this case, the norms of the reserve of a commercial bank should be less than half the value of each individual security.
The formation of this reserve should take place on the last day of the month when this paper was acquired by a commercial, credit institution. As soon as its retirement occurs, a certain amount is withdrawn from the bank account to the reserve. No matter how much the value and safety of all securities in an organization changes, a reserve needs to be made for each of them separately.
When such revaluations are carried out, a reserve is created that is capable of covering losses in the event of the depreciation of these assets. In this regard, banks' reserves, designed to reduce the risks of devaluation of securities, are more likely an adjustment to the value of an asset so that you can correctly draw up the company's balance sheet. Each commercial organization in this area is obliged to adjust monthly similar reserves created earlier, taking into account the number of securities and their market price.
Other types of bank reserves
The above types of reserves are the most basic and indispensable, but these are far from all the types necessary to preserve the liquidity of a banking organization.Also, in order to avoid losses, the organization is obliged to create the following banks reserves:
- reserves for balance assets, and all kinds of them are taken into account, if there is at least a small risk of losing capital;
- reserves in relation to instruments that are reflected in the unbalanced accounts of the accounting of the organization;
- reserves relating to all term transactions of a banking or commercial organization;
- additional reserve that can cover other losses not previously accounted for.
It is important to realize that in the event of a possible loss of a banking organization, a financial institution allows to form reserves only for hypothetical losses arising under certain circumstances. Here you can take into account the following points:
- if the cost of a credit, banking, commercial organization may decrease;
- if the amount of expenses or liabilities of the organization increases in comparison with those that are taken into account in the forecasts and accounting of the accounting department;
- if the counterparties of the bank do not fulfill the obligations imposed on them by the credit organization, the conditions of the transactions concluded by the bank and the like will not be fulfilled.
Bank reserves are divided into several types, and each of them plays a role in the implementation of the financial organization. In general, it is worth considering that of all the options considered, the most effective remains the reserve fund. The fact is that it can influence the ability of an organization to cover its expenses. The remaining types of reserves do not affect the level of a banking organization’s ability to withstand difficult periods in its operations. But they are important for maintaining bank solvency and liquidity.