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.

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

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

the 50/30/20 budget rule suggests

The 50/30/20 budget rule suggests allocating 50% of income to needs, 30% to wants, and 20% to savings

Liquidity trap

Interest rates near zero lower bound

Inflation targeting

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

Educational content, not financial advice.

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