Why are banks required to keep cash reserves either at the bank or at the Federal Reserve Bank?

Question

Macroeconomics question. So why, people?

Answer 1

So that when you go to withdrawal some cash they have some to give you. Or to ensure that when you write a check to someone the bank can pay it.

Answer 2

Cash reserves are needed not only for debt defaults, but also for cash withdrawals. Consumers usually carry around a little bit of cash for simple transactions or for making transactions for places that don't accept credit or debit cards (eg. cash flow cards). Also, some people use cash for large transactions because cash is untraceable by the financial system (eg. black market purchases of cocaine by cash). An example of debts a retail bank has is the amount of cash retail banks borrow from the central bank (eg. the Federal Reserve in the US), paying the wholesale interest rate (eg. the discount rate in the US).

Summary:

Why are cash reserves held by retail banks?
1.) To serve as a source of cash for daily business operations
2.) For cash withdrawals from clients
3.) To pay the debt defaults of the bank or for clients to pay their debt defaults

EDIT (in addition to Bob's answer):

This is just a helpful note to those studying monetary policy: America has abandoned the reserve ratio as a tool for implementing monetary policy, as has most other nations. For example, on average UK retail banks have a rather trivial Reserve Ratio of less than 1%. So the RR is not going to change.

Answer 3

Richard,
Banks are only required to keep cash reserves equal to 10% of their deposits and are free to loan out the rest. If you deposit $10,000. with a bank they may keep $1,000. on deposit and loan the rest out.Tremendous leverage? Nice work if you can get it and the get it every day.
But it goes much deeper than that. To learn why every bank loan is fraudulent visit www.BobPlimpton.com and download a FREE copy of my book "You were BORN FREE now you can LIVE FREE!"
You should also visit www.elimadebts.com and learn the full sad story of the Federal Reserve Bank which is NOT federal, has NO reserves and is NOT a bank.
Thanks for your interest in this subject. Would that EVERYONE were interested!
Bob Plimpton

Answer 4

To prevent bank runs. If banks don't keep a certain part of their assets in cash, they may not be able to process normal withdrawals on a timely basis.

Answer 5

Similar to you needed a down payment on a home loan. The bank is borrowing money from the FED, the FED wants something to guarantee the bank is able to pay the loan back. It also ensures the bank has money to pay/give customers.

Answer 6

they only keep fractional reserves (fractional reserve banking is the greatest scam ever invented! wouldn't you just love to loan out money that you don't have and collect interest on it?)

people still withdraw money (cash), so they have to maintain some level of reserve. someone above mentioned checks, but you don't need reserves to process checks.

Answer 7

so they can pay their depositors if they'll suddenly want their money back.