How Do You Calculate the Required Reserve Ratios?
Quick Answer
The required reserve ratio is not calculated by individuals or banks, but is instead set by those who oversee the banks for that particular economy. The required reserve ratio is the amount of deposited assets that a bank must keep immediately available. Its purpose is to ensure bank liquidity.
Continue ReadingFull Answer
While the required reserve ratio is set by an outside controlling financing board, the actual reserve ratio on hand can be calculated by dividing the amount of deposited money retained on hand by the bank by the total amount of deposited money that the bank has. For example, if a bank has $100 million in total deposits, but loans and invests all but $15 million, then the bank has a reserve ratio of 15 percent.
The larger the reserve ratio, the more liquidity the bank has. The reason a minimum is required for most banks is to ensure that the bank has enough cash on hand to handle normal operations, or to handle a run on the bank. The money that is not kept on hand is generally used by the bank in profit operations such as customer loans and investments. If bank balances rise without a rise in loans or investments, then the reserve ratio rises. If loans and investments rise without a rise in balances, then the ratio falls.
Learn more about BanksRelated Questions
-
Q:
What Are the Best Banks for Students?
A: U.S. News and World Report recommends Bank of America, Citibank and the Navy Federal Credit Union as the best banks for students. Other banks that scored h... Full Answer >Filed Under: -
Q:
What Are Some of the Best Banks in America?
A: According to U.S. News & World Report, some of the best banks in America are Wells Fargo, Bank of America, BBVA Compass Bank and Bank United. The First Nat... Full Answer >Filed Under: -
Q:
What Banks Offer Online Checking Accounts?
A: Several banks offer online banking and checking account services to their customers, including well-known banks like Bank of America, Chase and U.S. Bank, ... Full Answer >Filed Under: -
Q:
Is There a Way to Know Which Banks Are in Trouble?
A: One way to know which banks are in trouble is to check the bank's rating, notes Bankrate and BauerFinancial. A two-star or one-star rating on Bankrate.com ... Full Answer >Filed Under:
