Reserve ratio is a requirement that is used by most central banks of the world. It is put forward in relation to commercial financial and credit institutions. With this requirement, greater system stability is provided.
The minimum required reserve ratio is defined as a percentage of deposit liabilities. It consists of cash in a bank vault and the amount in the account of a commercial institution in a central bank.
As an economic tool
The required reserves ratio is used as a monetary policy tool. It affects interest rates by changing the size of available funds for loans. Central banks in Europe rarely increase the reserve ratio, because it immediately causes liquidity problems in small financial institutions. Often they use open market operations. Thus, monetary policy is implemented through the purchase and sale of government issuing obligations.
The People's Bank of China uses change requirements as a tool to fight inflation. In 2007, the required reserves ratio was increased tenfold. And then back at eleven.
Traditional point of view
In textbooks on economics, information on the required reserves ratio can often be found in the monetary policy section. The more requirements, the less funds from commercial banks. This leads to a decrease in cash emissions, which increases the purchasing power of cash in circulation. According to the traditional point of view, effects are multiplied. This is due to the fact that money received as a loan can be placed on deposit, and part of it is then issued on credit.
Required Reserves Ratio: Formula
The traditional view considers the effect of this requirement of central banks through the multiplier. We introduce the following conventions in order to determine the required reserves ratio:
- MB - monetary base.
- M1 - its most highly liquid part, cash and amounts on demand accounts.
- m is the money multiplier.
Thus, the effect of the norm of required reserves on the monetary base looks in our symbols as follows: M1 = MB * m. However, in most countries of the world the reserve ratio is not used as an instrument of monetary policy. This is due to the fact that its increase causes a sharp deterioration in the financial situation. Small banks can even go bankrupt without finding the necessary liquidity.
Modern theory
Some economists have criticized traditional notions of reserve requirements. They usually one way or another relate to the post-Keynesian concept of endogenous money. Representatives of this direction deny the existence of a deposit multiplier. They believe that commercial banks almost completely control the process of creating money in the economy. Therefore, the required reserves ratio has virtually no effect.
IN USA
In the United States of America, the minimum reserve ratio is set by the Fed and the Board of Governors of the bank. It depends on the category of deposit liabilities held by a financial institution. Now the norm in the United States is mainly set on demand accounts. Such requirements are not imposed on term deposits held by the bank. A commercial financial institution keeps in reserve not only cash in its own vault, but also amounts on sets.If the bank is a member of the Fed, then it keeps special deposits there.
According to data for 2015, the following requirements are established in the USA:
- If there are less than $ 15.2 million in customer demand accounts, then a reserve is not needed. This is too small a bank.
- If on demand accounts there are more than 15.2 million dollars, but less than 110.2, then this is 3% of the amount on them. These are medium banks.
- If there are more than 110.2 million dollars on demand accounts, then the maximum norm of required reserves is set at 10%. These are large banks.
If the financial institution does not have enough funds to satisfy the reserve requirements, the Fed can cover the deficit for 24 hours.
In Great Britain
The United Kingdom previously had a voluntary reservation system in place. The minimum norm has not been established. This actually meant that commercial banks might have no reserves at all. In 1999, the average figure for them was 0.15%. The reservation requirement was canceled in 1981.
From 1971 to 1981, it was 1.5%. From 1981 to 2009, each commercial financial institution agreed separately with the Bank of England on the size of its monthly voluntary reserve. In 2009, the system was changed. The Bank of England began to pay interest on surplus reservations.
Countries where the required reserve ratio is zero
Thus, some countries are much milder in providing deposits on demand. Canada, the United Kingdom, New Zealand, Australia, Sweden, and Hong Kong do not set a reserve requirement. However, one must understand that this does not mean that the banks of these countries can endlessly create money. They are limited by capital requirements. Many economists believe that they are much more effective than reserve liabilities. The central banks of these countries perform an extremely important function, providing the necessary reserves to protect the stability of the payment system.
