Why are reserves considered as liability side on a balance sheet?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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You might think that the reserves that banks hold would be listed as assets on their books because this is money that they have in their possession.  However, that is not the case.  Instead, reserves are listed under liabilities.  This is because that money does not actually belong to the bank.

To understand this, simply think about how the bank got the reserves mentioned in the question.   This is not money that the bank has earned by lending out money or through any other action.  Instead, this is money that depositors have placed in the bank.  The bank may have possession of the money, but it is actually owned by the depositors.  The bank must give that money to the depositors when they ask for it.  This is why the money in bank reserves is listed as a liability and not as an asset.

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