Legal Definitions - legal reserve

A legal reserve is a minimum amount of liquid assets that a bank or an insurance company must maintain by law to meet depositors' or claimants' demands. It is a fund of money set aside to cover future liabilities.

• Amortization reserve: An account created for bookkeeping purposes to extinguish an obligation gradually over time.
• Bad-debt reserve: A reserve to cover losses on uncollectible accounts receivable.
• Loss reserve: An insurance company's reserve that represents the estimated value of future payments, as for losses incurred but not yet reported.
• Mean reserve: In insurance, the average of the beginning reserve and the ending reserve of the policy year.
• Policy reserve: An insurance company's reserve that represents the difference between net premiums and expected claims for a given year.
• Required reserve: The minimum amount of money, as required by the Federal Reserve Board, that a bank must hold in the form of vault cash and deposits with regional Federal Reserve Banks.

For example, a bank must maintain a legal reserve to ensure that it has enough money to meet the demands of its depositors. This reserve is set by law and is a percentage of the bank's deposits. Similarly, an insurance company must maintain a legal reserve to cover future claims from policyholders. This reserve is based on the company's estimated future liabilities and is also set by law.