reserve ratio

Fin

the proportion of a bank’s deposits that must be kept in reserve.

     In the United Kingdom and in certain European countries, there is no compulsory ratio, although banks will have their own internal measures and targets to be able to repay customer deposits as they forecast they will be required. In the United States, specified percentages of deposits—established by the Federal Reserve Board—must be kept by banks in a non-interest-bearing account at one of the twelve Federal Reserve Banks located throughout the country.

     In Europe, the reserve requirement of an institution is calculated by multiplying the reserve ratio for each category of items in the reserve base, set by the European Central Bank, with the amount of those items in the institution’s balance sheets. These figures vary according to the institution.

     The required reserve ratio in the United States is set by federal law, and depends on the amount of checkable deposits a bank holds. The first $44.3 million of deposits are subject to a 3% reserve requirement. Deposits in excess of $44.3 million are subject to 10% reserve requirement. These breakpoints are reviewed annually in accordance with money supply growth. No reserves are required against certificates of deposit or savings accounts.

     The reserve ratio requirement limits a bank’s lending to a certain fraction of its demand deposits. The current rule allows a bank to issue loans in an amount equal to 90% of such deposits, holding 10% in reserve. The reserves can be held in any combination of till money and deposit at a Federal Reserve Bank.