Vault Cash and Reserve Accounts: Understanding the Differences

What are the key differences between vault cash and reserve accounts?

Both vault cash and reserve accounts provide for the bank's use of cash, but how do they differ in terms of their purpose, form, and relationship with the Federal Reserve?

Key Differences

Vault cash and reserve accounts serve different functions within the banking system. Vault cash refers to the physical cash held by a bank in its vaults and cash drawers to meet customers' demand for cash withdrawals and payments. On the other hand, reserve accounts are accounts held by banks at the Federal Reserve to satisfy reserve requirements and settle interbank transactions.

When we look at vault cash, it is used for day-to-day transactions where physical cash is needed, such as withdrawal and payments. Banks keep a certain amount of vault cash on hand to ensure they can meet these demands promptly. On the contrary, reserve accounts are primarily used for larger transactions and to maintain compliance with reserve requirements set by the Federal Reserve.

One notable difference between the two is that vault cash is part of the currency component of the monetary base, whereas reserve accounts are part of the reserves component. This means that vault cash directly impacts the money supply, while reserve accounts are more about meeting regulatory requirements and facilitating financial transactions between banks.

It's important to note that neither vault cash nor reserve accounts earn interest. However, reserve accounts may be subject to fees and charges imposed by the Federal Reserve. This makes managing these accounts a strategic decision for banks to optimize their cash holdings while meeting regulatory obligations.