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Encyclopedia > Reserve requirement

The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank. Image File history File links Merge-arrow. ... Fractional-reserve banking refers to the common banking practice of issuing more credit than the bank holds as reserves. ... Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines, aiming to uphold the soundness and integrity of the financial system. ... Bank reserves are banks holdings of deposits in accounts with their central bank (for instance the European Central Bank or the Federal Reserve, in the later case called federal funds), plus currency that is physically held in banks vaults (vault cash). ... For other uses, see Bank (disambiguation). ... This article does not cite any references or sources. ... Look up fiat in Wiktionary, the free dictionary. ... This article or section does not adequately cite its references or sources. ...


The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's economy, borrowing, and interest rates [2]. However, Central banks rarely alter the reserve requirements due to the fact that it would cause immediate liquidity problems for banks with low excess reserves. Instead, open market operations are used. As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply "M1"), and zero on time deposits and all other deposits. It has been suggested that monetary theory be merged into this article or section. ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... It has been suggested that this article or section be merged with bank reserves. ... Open market operations are the means of implementing monetary policy by which a central bank controls its national money supply by buying and selling government securities, or other instruments. ... In the United States transactions deposit is a term used by the Federal Reserve for checkable deposits and other accounts that can be used directly as cash without withdrawal limits or restrictions. ... In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... A time deposit (also known as a term deposit, particularly in Australia and New Zealand) is a money deposit at a bank that cannot be withdrawn for a certain term or period of time. ...


An institution that holds reserves in excess of the required amount is said to hold excess reserves. It has been suggested that this article or section be merged with bank reserves. ...

Contents

Reserve ratios

A cash reserve ratio (or CRR) is the percentage of bank reserves to deposits and notes. The cash reserve ratio is also known as the cash asset ratio or liquidity ratio. The Bank of England holds to a voluntary reserve ratio system. In 1998 the average cash reserve ratio across the entire United Kingdom banking system was 3.1%. Other countries have required reserve ratios (or RRRs) that are statutorily enforced (sourced from Monetary Macroeconomics by Dr. Pinar Yesin [1] ): Headquarters Coordinates , , Governor Mervyn King Central Bank of United Kingdom Currency Pound sterling ISO 4217 Code GBP Base borrowing rate 5. ...

Country Required
Reserve
Ratio %
Australia None
Canada None
Mexico None
Sweden None
United Kingdom None
Eurozone 2.00
Slovakia 2.00
Switzerland 2.50
Chile 4.50
India 7.50
Bulgaria 8.00
Latvia 8.00
Burundi 8.50
Hungary 8.75
China 12.50
Pakistan 7.00
Ghana 9.00
United States 10.00
Sri Lanka 10.00
Estonia 15.00
Zambia 17.50
Croatia 19.00
Tajikistan 20.00
Suriname 35.00
Jordan 80.00

In some countries, the cash reserve ratios have decreased over time (sourced from IMF Financial Statistic Yearbook): The Eurozone (also called Euro Area, Eurosystem or Euroland) refers to the European Union member states that have adopted the euro currency union. ...

Country 1968 1978 1988 1998
United Kingdom 20.5 15.9 5.0 3.1
Turkey 58.3 62.7 30.8 18.0
Germany 19.0 19.3 17.2 11.9
United States 12.3 10.1 8.5 10.3

Effects on money supply

Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 cash deposit can lend up to $90 of that deposit, keeping only a $10 cash deposit within the bank. If the borrower then writes a check to someone who deposited the $90, the bank receiving that deposit can lend out $81. As this fractional-reserve banking process continues, the banks can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500). Thus, higher reserve requirements should result in reduced creation of transaction deposits. Transactions deposit is a term used by the Federal Reserve for checkable deposits and other accounts that can be used directly as cash without withdrawal limits or restrictions. ... Fractional-reserve banking refers to the common banking practice of issuing more credit than the bank holds as reserves. ...


Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits such as CDs, have no reserve requirements and therefore can expand without regard to reserve levels. Furthermore, the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves. Consequently, reserve requirements currently play a relatively limited role in money creation in the United States. Transactions deposit is a term used by the Federal Reserve for checkable deposits and other accounts that can be used directly as cash without withdrawal limits or restrictions. ... The passbook is the traditional document to keep track of earnings in a savings account Savings accounts are accounts maintained by commercial banks, savings and loan associations, credit unions, and mutual savings banks that pay interest but can not be used directly as money (by, for example, writing a cheque). ... A time deposit (also known as a term deposit, particularly in Australia and New Zealand) is a money deposit at a bank that cannot be withdrawn for a certain term or period of time. ... A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions. ... The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ... The federal funds rate is the interest rate at which private depository institutions lend balances (federal funds) at the Federal Reserve to other depository institutions overnight. ...


References

  1. ^ Monetary Macroeconomics by Dr. Pinar Yesin [1]

See also

Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines, aiming to uphold the soundness and integrity of the financial system. ... The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. ... Fractional-reserve banking refers to the common banking practice of issuing more credit than the bank holds as reserves. ... Full-reserve banking is a theoretically conceivable banking practice in which all deposits, banknotes, and notes in a financial system would be backed up by assets with a store of value. ... Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. ... Central banks set monetary policy. ... Money creation is the process by which the money supply of a country is increased. ... In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... Reserves are banks holding of deposits in accounts with their national bank (for instance, the Federal Reserve), plus currency that is physically held by banks (vault cash). ...

External links

Articles


  Results from FactBites:
 
Reserve requirements - Wikipedia, the free encyclopedia (487 words)
Reserve requirements, a tool of monetary policy, are computed as percentages of deposits that banks must hold as vault cash or on deposit at the central bank (in the United States in a Federal Reserve Bank), rather than, perhaps, lend out.
Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money.
Furthermore, the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves.
FRB: Monetary Policy, Reserve Requirements (546 words)
Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.
The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the Federal Reserve Board's Regulation D to an institution's reservable liabilities (see table of reserve requirements).
Required reserves must be held in the form of vault cash and, if vault cash is insufficient, also in the form of a deposit maintained with a Federal Reserve Bank.
  More results at FactBites »

 
 

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