Primary
Reserves
Primary
reserves consist of cash on hand in the bank and deposits owed to it by other
banks. These are also called the legal reserves. From this cash on hand tellers
are able to meet customer demands for withdrawals, exchanges, and loans. Any
excess reserves may be invested in larger banks in the form of the loans; in
the United States these are called federal funds. Primary Reserve also called “First line of Defense”.
Total
cash required to support the operations of a bank, legal or mandatory reserve
requirements, and uncollected checks. Primary reserves cannot be loaned or
invested, but may be used in a liquidity crisis caused by sudden and heavy cash
withdrawals by bank's depositors.
Secondary
Reserves
Assets
invested in short-term marketable securities, usually Treasury bills and
short-term government securities. Legal reserve kept in a Central
Reserve Bank don't earn interest, but secondary reserves are a source of
supplemental liquidity. These earn interest and can be used to adjust a bank's
reserve position. If loan demand is slow, deposit funds often are invested in
short-term securities that are easily converted to cash. Secondary reserves are
not listed as a separate balance sheet item. Secondary Reserve also called “Second line of Defense”.
Securities purchased by a bank for investment purposes are known as secondary reserves. In the United States, much of this investment is in municipals-bonds and notes issued by local or state governments. Banks also buy bills, notes, and bonds issued by the United States Treasury and securities issued by other federal agencies. All such securities are low-risk investments.
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