Dear Sadia

Regulatory reserves are set by the central bank, or federal government, and will impact how much loans a bank can give out whereas statutory reserves are determined by legislative passed statutes for funds to be set aside to meet future maturity date obligations. Another form of a statutory reserves is related to capital impairment of common stock that comes from legislative passed statutes and enforced by the government or securities commission. This is where the common stock has a minimum par value or minimum book equity value that the bank or financial institution cannot compromise, i.e. dip below.

Dear Sadia Ahmad,

Mandatory reserves are those required in accordance with applicable legal norms and are determined by the institution of supervision over the financial or banking system. Statutory reserves, on the other hand, may be reserves established by the management of a particular commercial bank and only for its needs. However, on specific issues in each country, the issues of specific, mandatory, statutory and other reserves may be clarified through national supervision of the financial system. Individual commercial banks can raise their levels of held reserves above the level of required mandatory and purpose reserves. However, if they do so, they do not significantly increase above these levels because then a correspondingly larger part of the financial capital that could be used for granting, for example, loans is excluded from the credit activity, the loan is smaller, the proceeds from the sale of loans will also be lower and such the bank may lose in the market game against other banks, it may be less competitive. However, in a situation of economic downturn and deterioration of loan repayments, deterioration of the loan portfolio quality, a bank with a smaller amount of funds held in reserves may lose liquidity and the risk of bankruptcy is higher.

Best wishes

Thank you very much Dr. Raymond A K Cox and Dr. Dariusz Prokopowicz . You have resolved my biggest confusion.

Statutory is by law (by statute), not negotiable. Regulatory is by the regulator, even if it is not in the Statute. Can be introduced, modified or withdrawn by the Regulator as per the situation as assessed by the Regulator.

Thanks a lot Sir@ Emmanuel Vijayanand

The Statutory Reserve Requirement (SRR) is a monetary policy instrument available to Central Bank for purposes of liquidity management and hence credit creation in the banking system. The SRR is used to withdraw or inject liquidity when the excess or lack of liquidity in the banking system is perceived by the Bank to be large and long-term in nature. The banking institutions are required to maintain balances in their Statutory Reserve Accounts (SRA) equivalent to a certain proportion of their eligible liabilities (EL) , this proportion being the SRR rate.

Whereas, eligible liabilities (EL) base usually comprises of local (reporting) currency denominated deposits and non-deposit liabilities, net of inter-bank assets and placements with the Bank.

Thanks a lot @ Iftikhar Ahmad. Its really helpful

Statutory reserves are mandatory least amount of cash and marketable securities that banks must hold as a percentage of their deposits as directed by the Central Bank of their country.

Regulatory Reserves are reserves that banks are required to maintain by regulatory authorities on banking supervision.