Banks with more than $124.2 million in net transaction accounts were required to maintain a reserve of 10% of net transaction accounts. Banks with more than $16.3 million to $124.2 million needed to reserve 3% of net transaction accounts.


Are non-banking companies required to hold in reserve in certain situation? I am wondering if other financial companies like cryptocurrency companies, financial transaction companies like Visa, holding companies like Berkshire Hathaway might be forced to hold in a reserve like banks? Is it the case or is it only banks?

1 Answer 1


The purpose of a reserve requirement is to limit the degree to which someone can lend money with borrowed funds, which is what banks do. This is because greater leverage is a natural thing for investor owned entities to want, because it increases their return on investment from a given percentage return on total assets, but does so at the risk of greatly increasing the risk of default and bankruptcy if too large a share of the dollars lent default.

A 10% reserve requirement, for example, allows a bank to take a 10% loss on its loans and not become insolvent, which if the bank follows sound lending practices and makes mostly loans that are secured by collateral not likely to suddenly decline in value (like real estate in times when there is not a real estate bubble in place), is a very manageable standard to meet.

Publicly held companies are required to have a certain debt to equity ratio to remain in the major stock exchanges, but can continue to be publicly held companies that can't be traded on a major stock exchange even if they don't (although most corporate bonds contain privately imposed debt to equity ratio covenants, to limit corporate bondholders exposure the the same kinds of risk, which are usually much more than a 10% equity requirement reflecting the much greater uncertainty of income in non-banking corporations).

Insurance companies are required to hold reserves by state law, so that they have ample funds on hand to pay any reasonably foreseeable surge in claims made and to handle any reasonably foreseeable decline in the value of their reserve investments given the amount of investment risk involved in their investments.

A company like Visa (which is actually a cooperative) isn't subject to this kind of rule, because it doesn't extend credit, it merely processes transactions for other banks that actually extend the credit who are members of the cooperative.

Cryptocurrency companies are likewise more like a payment processing system from a functional perspective than they are like a bank, even though there are more similarities to a bank in that case.

A company like Berkshire Hathaway doesn't need reserve requirements because it too doesn't really have the business model of borrowing money from others and then investing that money, and making a profit from the leveraged spread between the borrowing rate and the investment return. Instead, it is functionally more like a mutual fund which predominantly invests its own equity and so is at no risk of default on its fixed debt obligations.

Many construction companies and government contractors, rather than truly having "reserves" are required as a condition of getting big contracts to be "bonded" which means that a solvent third-party must pay judgments entered against them by trade creditors. Bonding companies are required to set aside reserves as part of the state insurance regulation system. The bonding companies then set up means by which they can be paid in due course from the company they are bonding and any related bond guarantors if they have to pay out on the bond because the bonded company can't pay the judgments entered against it on the bonded claims.

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