Deposit Multiplier


DEFINITION of 'Deposit Multiplier'

A function that describes the amount of money created in a bank's money supply. This money is created by lending money that is in excess of its required reserve to borrowers.

Calculated as:

Deposit Multiplier

BREAKING DOWN 'Deposit Multiplier'

The Federal Reserve and other central banks require that banks must hold a minimum amount (required reserve) of money in their reserves in order to fulfill withdrawal requests from depositors. Banks are then allowed to lend out any excess to borrowers (such as for mortgages), while the liability incurred as a result of depositors is still on the books.

For example, suppose that the required reserve ratio is 25%. This means that the deposit multiple is four. For banks, this means that for every $4 that is deposited, a total of $1 must be kept in reserves.

  1. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  2. Non-Member Banks

    A bank that is not a member of the U.S. Federal Reserve System. ...
  3. Money Supply

    The entire stock of currency and other liquid instruments in ...
  4. Reserve Requirements

    Requirements regarding the amount of funds that banks must hold ...
  5. Undisclosed Reserves

    The unpublished or hidden reserves of a financial institution ...
  6. Multiplier Effect

    The expansion of a country's money supply that results from banks ...
Related Articles
  1. Fundamental Analysis

    Analyzing A Bank's Financial Statements

    A careful review of a bank's financial statements can help you identify key factors in a potential investment.
  2. Savings

    Are Your Bank Deposits Insured?

    Learn how the FDIC is helping to keep your money in your pockets.
  3. Forex Education

    Get To Know The Major Central Banks

    The policies of these banks affect the currency market like nothing else. See what makes them tick.
  4. Investing

    What a Fed Delay Means for the ECB & BoJ

    The Fed’s continued delay has repercussions for more than just the U.S. economy and markets. The ECB and the BoJ may support the case for stocks in Europe.
  5. Economics

    Understanding Income Inequality

    Income inequality refers to the uneven distribution of income across a single economy.
  6. Economics

    Who is a Hawk?

    In the economic sense of the word, a hawk is someone who believes high interest rates should be maintained to keep inflation low.
  7. Investing Basics

    Explaining Fixed Exchange Rates

    A government using a fixed exchange rate has linked the value of its currency to the value of another country’s currency, or the price of gold.
  8. Investing

    Latin America’s Economic Forecast

    After a ten-year run, the economies of Latin America are in a decline. For sustainable, long-term growth, the region needs structural reforms.
  9. Economics

    Why the Euro Failed to Become the World's Reserve Currency

    Examine the current state of the U.S. dollar as the world's reserve currency; learn the major reasons why the euro has failed to replace it in that capacity.
  10. Economics

    Should the Fed Be More Worried About Asset Bubbles?

    While the Fed should be concerned that assets bubbles might impact economic stability, monetary policy is not the best tool to mitigate this threat.
  1. How must banks use the deposit multiplier when calculating their reserves?

    The maximum amount of checkable deposits a bank creates through loaning money cannot exceed the amount of the bank's reserves ... Read Full Answer >>
  2. What is the difference between the deposit multiplier and the money multiplier?

    The terms "deposit multiplier" and "money multiplier" are often confused and used interchangeably, because they are very ... Read Full Answer >>
  3. How does the deposit multiplier affect a bank's profitability?

    The deposit multiplier creates the opportunity for a bank to increase profitability, but it can also increase the bank's ... Read Full Answer >>
  4. Who decides to print money in Russia?

    The Central Bank of the Russian Federation (CBRF), like its peers in most countries, is the governmental entity responsible ... Read Full Answer >>
  5. Who decides to print money in Canada?

    In Canada, new money comes from two places: the Bank of Canada (BOC) and chartered banks such as the Toronto Dominion Bank ... Read Full Answer >>
  6. Who decides when to print money in India?

    The Reserve Bank of India, or RBI, manages currency in India. The bank's additional responsibilities include regulating the ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!