1. What is Reserve Ratio?

The reserve ratio is a banking term that refers to the fraction of total deposits that a bank holds as reserves (rather than lending out). It's a key indicator of a bank's liquidity and financial stability.

2. How Does the Calculator Work?

The calculator uses the reserve ratio formula:

Where:

• \( \text{Reserves} \) — Total reserves held by the bank ($)
• \( \text{Deposits} \) — Total customer deposits ($)

Explanation: The formula calculates what percentage of total deposits a bank is holding as reserves rather than lending out.

3. Importance of Reserve Ratio

Details: The reserve ratio is crucial for banking regulation, monetary policy implementation, and ensuring financial system stability. Central banks often set minimum reserve requirements to control money supply and prevent bank runs.

4. Using the Calculator

Tips: Enter reserves and deposits amounts in dollars. Both values must be positive numbers, with deposits greater than zero for a valid calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is the typical reserve ratio requirement?
A: Reserve requirements vary by country and central bank policy. In the US, the Federal Reserve sets different requirements based on deposit amounts, typically ranging from 0% to 10%.

Q2: How does reserve ratio affect money supply?
A: Higher reserve ratios reduce the money multiplier effect, limiting how much banks can lend and thus contracting the money supply. Lower ratios have the opposite effect.

Q3: What's the difference between required and excess reserves?
A: Required reserves are the minimum amount banks must hold by regulation. Excess reserves are any additional reserves held above the required minimum.

Q4: Do all banks have the same reserve requirements?
A: No, reserve requirements often vary based on the size of the bank's deposits and sometimes the type of deposits.

Q5: How has reserve ratio policy changed over time?
A: Many central banks have lowered reserve requirements in recent decades, with some countries implementing zero reserve requirements as part of modern monetary policy tools.