Reserve requirement

Reserve requirements mandate minimum cash holdings for banks

The reserve ratio is determined by the central bank and can influence the lending capacity of banks. By adjusting the reserve ratio, monetary authorities can control the money supply. A higher reserve ratio reduces the amount banks can lend, while a lower reserve ratio allows for more lending.

Example

If a bank has $1 billion in deposits and the reserve ratio is 10%, the bank must hold $100 million in reserves.

Remember this

Understanding reserve requirements is crucial for banks to comply with regulations and for monetary authorities to manage the money supply effectively.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

Related concepts

Fractional-reserve banking

Banks lend out most of their deposits

Dual mandate (disambiguation)

Federal Reserve's dual mandate focuses on maximum employment and price stability

Margin Call

Margin call requires additional collateral due to increased credit risk

Liquidity trap

Interest rates near zero lower bound

Inflation targeting

Central banks aim for a specific inflation rate, usually 2%

Quantitative tightening

Central banks use QT to reduce money supply and increase interest rates

Educational content, not financial advice.

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