Wednesday, April 17, 2024

Reserve Ratio

Deposit Reserve Ratio (RRR) or Cash Reserve Ratio (CRR) is the amount of customer deposits and other liquid assets that commercial banks must store within themselves Percent agency or central bank.

The reserve requirement ratio is set by the central bank to ensure that commercial banks have enough assets to pay depositors in the event of unusually high withdrawals.

What is the deposit reserve ratio?

The reserve requirement ratio (RRR) is a key regulatory tool used by central banks to control the amount of reserves that financial institutions, such as commercial banks, must hold for their deposit liabilities.

The reserve requirement ratio, usually expressed as a percentage, represents the proportion of total deposit liabilities that a bank must hold as reserves.

These reserves can be held as cash in bank vaults or as deposits at the central bank.

What is the purpose of the deposit reserve ratio?

The primary purpose of the deposit reserve ratio is to ensure financial stability, promote the smooth operation of the payment system, and implement monetary policy.

By adjusting the reserve requirement ratio, the central bank can influence the supply of money and credit in the economy and control short-term interest rates.

  • When the central bank raises the deposit reserve ratio , banks are required to hold a larger proportion of their deposit liabilities as reserves, which reduces the amount of funds available for lending. This could lead to a contraction in the money supply and tightening of monetary conditions.
  • When the central bank lowers the deposit reserve ratio , banks can retain a smaller proportion of deposit reserves, which increases the amount of funds available for lending and can lead to an expansion of the money supply and easing of monetary conditions.

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