What are transaction deposits required for in banks?

Transaction deposits are indeed required for banks to maintain reserves at the central bank. When customers deposit money into their checking or savings accounts, these funds are categorized as transaction deposits. Banks must hold a certain percentage of these deposits as reserves, which are maintained to ensure the financial institution can meet withdrawal demands and comply with regulatory requirements.

The reserves serve as a buffer to promote liquidity and stability within the banking system. Central banks typically set reserve requirements that mandate how much of these deposits banks must keep readily available, influencing the overall money supply and economic activity. This mechanism is crucial for the central bank's ability to implement monetary policy effectively.

While the other options reflect activities that banks engage in, they do not relate directly to the requirements associated with transaction deposits. Funding long-term investments, purchasing capital assets, or issuing loans to other banks are more strategically leveraged uses of a bank's funds but are not specifically tied to the regulatory requirement for reserves based on transaction deposits.