Lagged Reserves
Categories: Econ
Banks are required to have a certain amount of money set aside to run their normal business, and for emergencies. They need cash on hand for depositors to take out and cash checks, as well as for after-hours money fights.
This supply of cash is known as the bank's reserve. The main bank regulator, the Federal Reserve, sets minimum reserve levels that banks have to follow. These guidelines ensure that a company doesn't get fast and easy with its loot, leaving it vulnerable to an unexpected run.
Lagged reserves represent a category of these requirements. The rule stipulates that the reserve held with a Federal Reserve bank must equal the total of demand deposits the financial institution had two weeks ago.
That's where the "lagged" part comes in. The rule looks back two weeks, sees how much money the bank needed, and uses that as a guideline as to how much the bank should hold now.