Reserves accounts are effectively sterling current accounts for commercial banks - they are among the safest assets a bank can hold and are the ultimate means of payment between banks. Whenever payments are made between the accounts of customers at different commercial banks, they are ultimately settled by transferring central bank money (reserves) between the reserves accounts of those banks.
Reserves balances can be varied freely to meet day-to-day liquidity needs. For example, funds can be moved on and off reserves accounts up to the close of CHAPS in order to accommodate unexpected, end-of-day payment in/outflows. In this way, reserves balances can be used as a liquidity buffer. The reserves they hold on their accounts are considered "liquid assets" for the purpose of the PRA's liquidity requirements.
The Bank currently provides reserves via the assets purchased as part of Quantitative Easing, and regular Indexed Long-Term Repo operations. All reserves account balances earn Bank Rate. The current operation of the Reserves scheme is set out in more detail in the Red Book:
Red Book - Chapter VIII - The Reserves Scheme
The main SMF Documentation sets out how the scheme works. These may be amended by the Bank from time to time by Market Notices.
Market Notice: Sterling Monetary Framework
Effective 6 August 2009