reserve requirements

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The minimum percentage of their total assets which banks or other financial institutions are required to hold in money balances, or in some form of highly liquid assets. Minimum reserve requirements may be used as instruments of monetary policy, or as methods of trying to ensure the institutions' solvency. They are not satisfactory as guarantees of solvency, as they take no account either of the riskiness of the institutions' other assets, or of the adequacy of their capital. A financial institution whose assets depreciate so that they are worth less than its debts will be insolvent, regardless of the high liquidity of its remaining assets.

Subjects: Economics.

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