What Is a Reserve Ratio Formula?

A reserve ratio formula is used for calculating how much money banks can loan out as a percentage of the deposits they have on hand. It takes into account the required reserve ratio, which is the amount of money the federal government requires a bank to keep in reserve.

The reserve ratio formula is given as T=A*(1-r)^n. T is the amount of money the bank can loan out, r is the reserve ratio, A is the amount of money flowing in to the bank, and n is the period of time being evaluated. As an example, imagine a bank with an income of $10 billion and a reserve ratio of 10 percent in the second quarter of the business year. The reserve ratio formula for this bank would be T=10 billion*90².