Loading the player...

What is the 'Reserve Ratio'

The reserve ratio is the portion of depositors' balances that banks must have on hand as cash. This is a requirement determined by the country's central bank, which in the United States is the Federal Reserve. The reserve ratio affects the money supply in a country at any given time.

BREAKING DOWN 'Reserve Ratio'

If he Federal Reserve, for example, determined the reserve ratio to be 11%, this means all banks must have 11% of their depositors' money on reserve in the bank. So, if a bank has deposits of $1 billion, it is required to have $110 million on reserve.

Depository institutions in the United States are required to hold reserves in the form of vault cash with the Federal Reserve. The reserve amount is referred to as the reserve requirement because it is the amount banks must hold in reserves against liabilities or loans outstanding. The reserve amount is specified by the Federal Reserve Board’s Regulation D. Regulation D created a set of uniform reserve requirements for all depository institutions with transaction accounts, and requires banks to provide regular reports to the Federal Reserve.

Reserve Requirements

Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors of the Federal Reserve has the sole authority over changes in reserve requirements. Banks must hold reserves in the form of vault cash or deposits with Federal Reserve Banks. On Oct. 1, 2008, the Federal Reserve began paying interest to banks on these reserves. This rate is referred to as the interest rate on required reserves (IORR). There is also an interest rate on excess reserves (IOER). The Federal Reserve uses both rates as a proxy for the fed funds rate, which was raised for the first time in nearly a decade on December 2015. As of Dec. 17, 2015, both rates are 0.50%. Interest is paid out to banks in the form of cash, not in reserves like quantitative easing.

Reserve Ratio

The reserve ratio depends on the bank's net loans, and the Federal Reserve measures this with net transactions. As of Jan. 21, 2016, the reserve ratio for a depository institution with less than $15.2 million in deposits is zero percent. If net transactions are between $15.2 million and $110.2 million, the reserve ratio is 3 percent. If net transactions are higher than $110.2 million, the reserve ratio is 10%. The majority of banks in the United States fall into the last category.

RELATED TERMS
  1. Reserve Requirements

    Requirements regarding the amount of funds that banks must hold ...
  2. Bank Reserve

    Bank reserves are the currency deposits which are not lent out ...
  3. Reservable Deposit

    A bank deposit subject to reserve requirements. Reserve requirements ...
  4. Working Reserves

    Reserves held by banks above the required minimum level - or ...
  5. Free Reserves

    A measurement of a bank's reserves that is equal to the difference ...
  6. Excess Reserves

    Capital reserves held by a bank or financial institution in excess ...
Related Articles
  1. Personal Finance

    Explaining the Reserve Ratio

    Reserve ratio is the amount of cash a bank must keep in its bank vaults or deposit into a central, governing bank.
  2. Investing

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  3. Personal Finance

    What's the Federal Funds Rate?

    The federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements.
  4. Insights

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  5. Insights

    Regional Banks Give The Fed A National Perspective

    We all know that the Federal Reserve utilizes monetary policy to control the economy, but what do the 12 regional Federal Reserve Banks do?
  6. Insights

    A Primer On Reserve Currencies

    For nearly a century, the U.S. dollar has served as the world's premier reserve currency, but the future is uncertain.
  7. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  8. Personal Finance

    Explaining the Federal Discount Rate

    The federal discount rate is the rate at which eligible banks or other depository institutions can borrow funds from a Federal Reserve bank.
  9. Investing

    How Does Reserve Work and Make Money?

    Learn what Reserve is and how it makes money through securing reservations at fine dining establishments for clients willing to pay for its premium service.
RELATED FAQS
  1. What do banks do to control the bank reserve?

    Understand what the Federal Reserve does in order to expand or contract the economy. Learn what depository institutions can ... Read Answer >>
  2. Who determines the reserve ratio?

    Understand what the Federal Reserve is and what it regulates in the U.S. economy. Learn about the reserve ratio and how the ... Read Answer >>
  3. How are bank reserve requirements determined and how does this affect shareholders?

    Learn how bank reserve requirements are determined and how bank reserves affect shareholders through improved bank stability ... Read Answer >>
  4. Why would the Federal Reserve change the reserve ratio?

    Understand the Federal Reserve's monetary policy and the tools it uses to change that monetary policy. Learn about the reserve ... Read Answer >>
  5. What happens if the Federal Reserve lowers the reserve ratio?

    Learn about the Federal Reserve's monetary policy and the tools it uses to control it. Understand what happens if the Federal ... Read Answer >>
  6. Which nations' economies have reserve ratios?

    Learn more about the inconsistent imposition of depository banking reserve ratios, and why the United States stands alone ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center