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A monetary policy tool for money market management that requires banks to keep part of client deposits in a correspondent account with the NBU.

RESERVE REQUIREMENTS are one of the oldest traditional instruments used by central banks. In its earliest days, this tool also performed a prudential (supervisory) function, as the imposition of reserve requirements guaranteed that banks would have sufficient liquidity to meet their commitments.

As the instrument evolved, its monetary and supervisory roles became two distinct, separate functions. Specific economic ratios are currently in place to ensure that banks maintain sufficient liquidity. On the other hand, the NBU uses reserve requirements as an additional monetary policy tool, as do many other inflation-targeting central banks. The NBU also deploys this instrument for macroprudential purposes, in particular to de-dollarize the economy and change the term structure of bank liabilities.

Here is how reserve requirements essentially operate: a bank takes responsibility to set aside in its correspondent account an amount of funds expressed as a certain percentage of the bank’s liabilities (also known as a reserve ratio). This amount must include the share of reserve requirements that the bank covers with benchmark domestic government debt securities. This amount is calculated as an average value over the course of the provisioning period, “average” meaning that if the bank fails to reserve a certain sum on a given day, it must put away more on other days. The averaging mechanism allows the bank to flexibly dispose of its own liquidity. This makes it possible to smooth out potential ad hoc (unpredictable) fluctuations in liquidity, while also ensuring the effective use of reserve requirements for their primary purpose, which is to limit the banking system’s excess liquidity.

All banks must meet established uniform ratios and procedures for identifying, accumulating, and storing their required reserves. The NBU may establish different reserve ratios for various types of liabilities.