Reserves include what banks keep with central bank plus currency(papers and coins) kept in the bank vaults.
Reserves are held for two reasons:
First, it is required by regulations that banks must keep afraction (required reserve ratio) of the money in their checkabledeposits as reserve. This is called required reserves.
Second, banks hold additional reserves, called excessreserves, to meet obligations when funds are withdrawn,directly by a depositors or indirectly when a check is written onan account.
Cash items in process of collection
.When a check written on an account at another bank is deposited inyour bank and the funds for this check has not been collected fromthe other bank, it is an asset for your bank because it is a claim onanother bank for funds that will be paid within a few days.
Deposits at other banks (corresponding banking)
Many small banks hold deposits in larger banks in exchange for avariety of services, including check collection, foreign exchangetransactions, and help with securities purchase.
A bank’s holdings of securities are an important income-earningasset.
Banks make their profits primarily by issuing loans. Because of thelack of liquidity and higher default risk, the bank earns its highestreturn on loans.