Bank reserves are the funds that banks keep in their vaults or deposit with central banks rather than lending out. Minimum reserve requirements are set by central banks to ensure banks can return funds to customers upon request and avoid bank runs. The purpose of holding reserves is to appear solvent, though banks can earn more by lending funds. Reserve levels decrease during economic expansion as lending increases, and rise during recessions.

1. Definition of 'Bank Reserve'
banks reserves are the currency deposits which are not lent out to the bank's clients. A small
fraction of the total deposits is held internally by the bank or deposited with the central bank.
Minimum reserve requirements are established by central banks in order to ensure that the
financial institutions will be able to provide clients with cash upon request.
explains 'Bank Reserve'
The main purpose of holding reserves is to avoid bank runs and generally appear solvent.
Central banks place these restrictions on banks, because the banks can earn a much larger
return on their capital by lending out money to clients rather than holding cash in their vaults
or depositing it with other institutions. Bank reserves decrease during periods of economic
expansion and increase during recessions.
Definition of 'Balance Of Payments - BOP'
A record of all transactions made between one particular country and all other
countries during a specified period of time. BOP compares the dollar difference of the
amount of exports and imports, including all financial exports and imports. A negative
balance of payments means that more money is flowing out of the country than coming in,
and vice versa.
explains 'Balance Of Payments - BOP'
Balance of payments may be used as an indicator of economic and political stability. For
example, if a country has a consistently positive BOP, this could mean that there is
significant foreign investment within that country. It may also mean that the country does not
export much of its currency.
This is just another economic indicator of a country's relative value and, along with all other
indicators, should be used with caution. The BOP includes the trade balance, foreign
investments and investments by foreigners.
Foreign exchange reserves (Check item No.9 in above figure) shows the reserves which are
held in the form of foreign currencies usually in hard currencies like dollar, pound etc., gold
and Special Drawing Rights (SDRs). Foreign exchange reserves are analogous to an
individual's holding of cash. They increase when the individual has a surplus in his
transactions and decrease when he has a deficit. When a country enjoys a net surplus both in
current account & capital account, it increases foreign exchange reserves. Whenever current
account deficit exceeds the inflow in capital account, foreign exchange from the reserve
accounts is used to meet the deficit If a country's foreign exchange reserves rise, that
transaction is shown as minus in that country's balance of payments accounts because money
is been transferred to the foreign exchange reserves.
Foreign exchange reserves (forex) are used to meet the deficit in the balance of payments.
The entry is in the receipt side as we receive the forex for the particular year by reducing the
balance from the reserves. When surplus is transferred to the foreign exchange reserve, it is
shown as minus in that particular year's balance of payment account. The minus sign (-)

2. indicates an increase in forex and plus sign (+) shows the borrowing of foreign exchange
from the forex account to meet the deficit.