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Price fluctuations in exchange markets result in gains and losses in the purchasing power of reserves. A reserve requirement is a fraction of certain liabilities from the right hand side of the balance sheet that must be held as a certain kind of asset from the left hand side of the balance sheet. From Wikipedia, the free encyclopedia. Price will close below bottom envelopes line. Profit should be taken quick, and especially in volatile market.
There are several variants of each of these definitions,  and the financial statements are usually adjusted before the values are computed. After the s, quantitative limits on bank leverage were rare. Banks in most countries had a reserve requirement , a fraction of deposits that was required to be held in liquid form, generally precious metals or government notes or deposits.
This does not limit leverage. A capital requirement is a fraction of assets that is required to be funded in the form of equity or equity-like securities. Although these two are often confused, they are in fact opposite. A reserve requirement is a fraction of certain liabilities from the right hand side of the balance sheet that must be held as a certain kind of asset from the left hand side of the balance sheet. A capital requirement is a fraction of assets from the left hand side of the balance sheet that must be held as a certain kind of liability or equity from the right hand side of the balance sheet.
Before the s, regulators typically imposed judgmental capital requirements, a bank was supposed to be "adequately capitalized," but these were not objective rules. National regulators began imposing formal capital requirements in the s, and by most large multinational banks were held to the Basel I standard. Basel I categorized assets into five risk buckets, and mandated minimum capital requirements for each. This limits accounting leverage. While Basel I is generally credited with improving bank risk management it suffered from two main defects.
It did not require capital for all off-balance sheet risks there was a clumsy provisions for derivatives, but not for certain other off-balance sheet exposures and it encouraged banks to pick the riskiest assets in each bucket for example, the capital requirement was the same for all corporate loans, whether to solid companies or ones near bankruptcy, and the requirement for government loans was zero.
Work on Basel II began in the early s and it was implemented in stages beginning in Basel II attempted to limit economic leverage rather than accounting leverage.
It required advanced banks to estimate the risk of their positions and allocate capital accordingly. While this is much more rational in theory, it is more subject to estimation error, both honest and opportunitistic. However, in view of the problems with Basel I, it seems likely that some hybrid of accounting and notional leverage will be used, and the leverage limits will be imposed in addition to, not instead of, Basel II economic leverage limits.
The financial crisis of — , like many previous financial crises, was blamed in part on "excessive leverage". Levering has come to be known as "leveraging", in financial communities; this may have originally been a slang adaptation, since leverage was a noun. However, modern dictionaries such as Random House Dictionary and Merriam-Webster's Dictionary of Law  refer to its use as a verb , as well. From Wikipedia, the free encyclopedia.
Fixed pegs were usually used as a form of monetary policy, since attaching the domestic currency to a currency of a country with lower levels of inflation should usually assure convergence of prices. In a pure flexible exchange rate regime or floating exchange rate regime, the central bank does not intervene in the exchange rate dynamics; hence the exchange rate is determined by the market. Theoretically, in this case reserves are not necessary. Other instruments of monetary policy are generally used, such as interest rates in the context of an inflation targeting regime.
Milton Friedman was a strong advocate of flexible exchange rates, since he considered that independent monetary and in some cases fiscal policy and openness of the capital account are more valuable than a fixed exchange rate. Also, he valued the role of exchange rate as a price. As a matter of fact, he believed that sometimes it could be less painful and thus desirable to adjust only one price the exchange rate than the whole set of prices of goods and wages of the economy, that are less flexible.
Mixed exchange rate regimes 'dirty floats' , target bands or similar variations may require the use of foreign exchange operations to maintain the targeted exchange rate within the prescribed limits, such as fixed exchange rate regimes. As seen above, there is an intimate relation between exchange rate policy and hence reserves accumulation and monetary policy.
Foreign exchange operations can be sterilized have their effect on the money supply negated via other financial transactions or unsterilized. Non-sterilization will cause an expansion or contraction in the amount of domestic currency in circulation, and hence directly affect inflation and monetary policy. For example, to maintain the same exchange rate if there is increased demand, the central bank can issue more of the domestic currency and purchase foreign currency, which will increase the sum of foreign reserves.
Since if there is no sterilization the domestic money supply is increasing money is being 'printed' , this may provoke domestic inflation. Also, some central banks may let the exchange rate appreciate to control inflation, usually by the channel of cheapening tradable goods. Since the amount of foreign reserves available to defend a weak currency a currency in low demand is limited, a currency crisis or devaluation could be the end result. For a currency in very high and rising demand, foreign exchange reserves can theoretically be continuously accumulated, if the intervention is sterilized through open market operations to prevent inflation from rising.
On the other hand, this is costly, since the sterilization is usually done by public debt instruments in some countries Central Banks are not allowed to emit debt by themselves. In practice, few central banks or currency regimes operate on such a simplistic level, and numerous other factors domestic demand, production and productivity , imports and exports, relative prices of goods and services, etc.
Besides that, the hypothesis that the world economy operates under perfect capital mobility is clearly flawed. As a consequence, even those central banks that strictly limit foreign exchange interventions often recognize that currency markets can be volatile and may intervene to counter disruptive short-term movements that may include speculative attacks.
Thus, intervention does not mean that they are defending a specific exchange rate level. Hence, the higher the reserves, the higher is the capacity of the central bank to smooth the volatility of the Balance of Payments and assure consumption smoothing in the long term. After the end of the Bretton Woods system in the early s, many countries adopted flexible exchange rates.
In theory reserves are not needed under this type of exchange rate arrangement; thus the expected trend should be a decline in foreign exchange reserves. However, the opposite happened and foreign reserves present a strong upward trend.
Reserves grew more than gross domestic product GDP and imports in many countries. The only ratio that is relatively stable is foreign reserves over M2. Ratios relating reserves to other external sector variables are popular among credit risk agencies and international organizations to assess the external vulnerability of a country.
For example, Article IV of  uses total external debt to gross international reserves, gross international reserves in months of prospective goods and nonfactor services imports to broad money , broad money to short-term external debt, and short-term external debt to short-term external debt on residual maturity basis plus current account deficit.
Therefore, countries with similar characteristics accumulate reserves to avoid negative assessment by the financial market, especially when compared to members of a peer group. Reserves are used as savings for potential times of crises, especially balance of payments crises. Original fears were related to the current account, but this gradually changed to also include financial account needs.
If a specific country is suffering from a balance of payments crisis, it would be able to borrow from the IMF. However, the process of obtaining resources from the Fund is not automatic, which can cause problematic delays especially when markets are stressed.
Therefore, the fund only serves as a provider of resources for longer term adjustments. Also, when the crisis is generalized, the resources of the IMF could prove insufficient. After the crisis, the members of the Fund had to approve a capital increase, since its resources were strained.
Most countries engage in international trade , so to ensure no interruption, reserves are important. A rule usually followed by central banks is to hold the equivalency of at least three months of imports in foreign currency. Also, an increase in reserves occurred when commercial openness increased part of the process known as globalization. Reserve accumulation was faster than that which would be explained by trade, since the ratio has increased to several months of imports.
Furthermore, the external trade factor explains why the ratio of reserves in months of imports is closely watched by credit risk agencies. The opening of a financial account of the balance of payments has been important during the last decade.
Hence, financial flows such as direct investment and portfolio investment became more important. Usually financial flows are more volatile that enforce the necessity of higher reserves. Moreover, holding reserves, as a consequence of the increasing of financial flows, is known as Guidotti—Greenspan rule that states a country should hold liquid reserves equal to their foreign liabilities coming due within a year.
Reserve accumulation can be an instrument to interfere with the exchange rate. Hence, commercial distortions such as subsidies and taxes are strongly discouraged. However, there is no global framework to regulate financial flows.
As an example of regional framework, members of the European Union are prohibited from introducing capital controls , except in an extraordinary situation. Some economists are trying to explain this behavior. Usually, the explanation is based on a sophisticated variation of mercantilism , such as to protect the take-off in the tradable sector of an economy, by avoiding the real exchange rate appreciation that would naturally arise from this process.
One attempt  uses a standard model of open economy intertemporal consumption to show that it is possible to replicate a tariff on imports or a subsidy on exports by closing the current account and accumulating reserves. Another  is more related to the economic growth literature. The argument is that the tradable sector of an economy is more capital intense than the non-tradable sector.
The private sector invests too little in capital, since it fails to understand the social gains of a higher capital ratio given by externalities like improvements in human capital, higher competition, technological spillovers and increasing returns to scale. Downtrend forming - Tendency: Ichimoku cloud is also showing signs of bearish pressure in line with our bearish bias.
I am expecting a bounce off of the 20 period EMA after the surge we had during the Asian session. Now I am not jumping with market execution so pay attention the details below. Stochastic 34,5,3 is also approaching resistance and we The information contained in this presentation is solely for educational purposes and does not constitute investment advice.
We may or We may not take the trade. The risk of trading in securities