What Is the Required Reserve Ratio

Banks like lending but the Federal Reserve does not allow them for some good reasons. The reason is the required reserve ratio. What is the required reserve ratio all about? In this guide, you will learn required reserve ratio definition and its short history so that you can solve your homework problem easily. Later, you will also learn where to get help and economics homework answers when you need it for the homework.

required reserve ratio definition

Short History of Required Reserve Ratio

Reserves are bank deposits portion that banks are holding; however, they don’t loan these out. The fact is that it is set by Federal Reserve and it is being expressed as bank total deposits percentage.

General Information about Required Reserve Ratio

The reserve ratio depends on the net loans of the bank in which the Federal Reserve is the one that measures it with the net transactions. Additionally, the level of reserve is essential for some reasons because banks do not only create profits through lending others; they also make more money for doing it. For instance, if the bank has reserve ratios of ten percent, then deposits $900,000, banks can lend out an amount of $800,000.

With that in mind, the depositors have all the means in withdrawing the deposits. In addition, reserves are essential because the banks are loaning out the money and it is their obligation to return it to you. They should have sufficient money in the reserve to honour withdrawal requests.

what is the required reserve ratio formula

So what is required reserve ratio definition? Required reserve ratio definition is the liquid assets that a bank or other mandates that the bank keeps at all times. It is being expressed as the percentage of the bank total deposits. It exists in ensuring that banks are able to pay an unusually high number of demands on withdrawals. It also helps in ensuring the banks not over-leverage themselves.

Required Reserve Ratio Formula

To know the required reserve ratio, you need to know the required reserve ratio formula is. Even if the required reserve ratio is determined by an external regulating finance board, the reserve ratio can be measured by “dividing money amount deposited which is kept by the bank by the total money deposited it has.” So for example, if the bank has $100 M as total amount of deposits but invests and loans are all $15 million, the bank has 15% reserve ratio.

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