Deposit Reserves vs. Provision Funds: A Simple Guide to What Banks Can Freely Use

Gold‑Backed Deposit Products and Exposure Management

The author previously introduced “gold‑backed deposit” (积存金), a liability linked to physical gold that has generated unexpected revenue for many banks since last year, and notes that their own bank has embedded this product into high‑traffic internet platforms.

When analyzing a new business domain, a technology architect must anticipate future development directions and prepare technically. The author asks whether the obvious strategy is to connect the product with large platforms such as Ant, JD, or WeChat, but answers that this is not the right move because banks often have money but cannot earn it.

Gold exposure management : Commercial banks typically hold little physical gold, yet a gold‑backed deposit creates a gold‑linked liability. The bank must manage its “gold position.” In periods of large gold price volatility, poor position management can create a huge gold exposure, leading to severe losses and demanding high‑level gold trading capability.

Gold provision fund : According to the People’s Bank of China’s interim measures on gold‑deposit business, banks must establish a physical‑gold provision management system, strengthen liquidity management of physical gold, and satisfy customer requests for physical gold withdrawal.

For example, if a bank reserves 1 % of its gold holdings, and the gold‑backed deposits represent 100 tons of gold, the bank must hold 1 ton of physical gold; if the deposits represent 10 000 tons, the bank must hold 100 tons. Managing the buying, selling, and custody of such quantities becomes a critical issue, and the actual regulatory rules are more complex than this simple illustration.

Deposit Reserves and Provision Funds

The discussion then introduces the concept of “provision management system.” According to Article 32 of the Commercial Bank Law of the People’s Republic of China , commercial banks must, in accordance with the People’s Bank of China’s regulations, deposit reserve funds and retain provision funds.

Deposit reserve is the portion of deposits that the central bank mandates banks to lock up and cannot be used freely. For instance, if a bank’s total deposits are 100 units and the reserve ratio is 10 %, the bank must deposit 10 units with the central bank, leaving 90 units for its own use.

This mechanism prevents banks from lending out all deposits, thereby reducing the risk of a run and stabilizing the financial system. When the central bank lowers the reserve ratio (known as “降准”), banks gain more freely disposable funds; e.g., lowering the ratio to 5 % would allow the same bank to use 95 units.

Provision fund (also called excess reserve or daily cash reserve) is the liquidity that banks keep on hand for everyday operations such as customer withdrawals, inter‑bank transfers, and settlement. It is the “pocket money” that banks retain for daily cash flow needs.

In short, deposit reserves are the mandatory, locked‑down base money, while provision funds are the bank’s own daily operating cash used to meet routine withdrawals, transfers, and payments.

Therefore, after a bank takes in deposits, the amount that remains free for the bank to “play” is the total deposits minus the deposit reserve and the provision fund.