Bank reserves are the portion of total deposits that commercial banks hold as cash in their vaults or as deposits at the central bank. The main purpose is to ensure banking system stability and meet sudden customer withdrawal demands.
There are two types of reserves: Required Reserves (the minimum amount set by the central bank that banks must hold against their deposits) and Excess Reserves (any amount banks voluntarily hold above the required minimum). Banks can lend from their excess reserves or keep them for extra liquidity.
Central banks use the reserve ratio as a key monetary policy tool. Increasing the reserve ratio reduces banks' lending capacity, which tightens money supply. Decreasing it gives banks more room to lend, expanding money supply and stimulating economic activity.
In Bangladesh, Bangladesh Bank sets the Cash Reserve Requirement (CRR) for commercial banks, currently around 4%. Through CRR and other reserve management tools, Bangladesh Bank controls liquidity and interest rates in the financial market.