What are bank reserves?

• A. Currency held by the central bank.
• B. Currency held by banks in their vaults plus their deposits at the Federal Reserve.
• C. The deposits that banks owe to customers.
• D. The total reserves banks hold at the Federal Reserve.

Answer: (B)

Bank reserves are the funds that a bank keeps readily available to meet withdrawals and to settle payments with other banks. This includes currency held in the bank’s own vaults plus deposits the bank has at the central bank (the Federal Reserve). That combination—vault cash plus Fed deposits—is what true reserves consist of. Deposits owed to customers are liabilities on the bank’s books, not reserves, and just counting reserves at the Federal Reserve misses the cash the bank keeps on hand. So the best description is the cash in vaults plus deposits at the central bank, which together form the bank’s reserve holdings.