reserve requirement

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Reserve Ratios

The liquid assets that a central bank or other body mandates that a bank keep at all times. The reserve ratio is expressed as a percentage of the bank's total deposits. The reserve ratio exists to ensure that the bank is able to pay an unusually high number of withdrawals on demand accounts should that event occur. It also helps ensure that the bank does not over-leverage itself. In some countries, increasing or decreasing reserve ratios may be used to help control the money supply. See also: Basel II, Monetary Policy.

reserve requirement

The required percentage of reserves (deposits) that banks and thrifts must hold in cash or in deposits at the Federal Reserve. This requirement is set by the Fed. Any changes in the required percentage are used to influence credit conditions. An increased percentage requirement means fewer funds available for lending and a resultant rise in interest rates. See also monetary policy.

Reserve requirement.

The Federal Reserve requires its member banks to keep a certain percentage of their customer deposits in cash and other liquid assets in reserve at all times.

The required percentage may be revised at the Fed's discretion, but it has not been changed in recent years.

When a bank finds itself with excess reserves, it can lend them to other banks that may need them. These very short-term loans are known as federal funds and the interest rate the lenders charge is called the federal funds rate. That's also the benchmark rate for many corporate and international government loans.

References in periodicals archive ?
Worries over a Greek debt default had sent markets lower on Friday but today the mood was buoyed by a decision by China's central bank to cut the required reserve ratio for banks by 1%.
Banks have been collecting gold as the Central Bank raised the required reserve ratio for lira liabilities that can be held in gold from 10 percent to 20 percent last year.
The bank could impose a higher required reserve ratio on banks whose leverage ratio is 3 percent or less.
As calls grew louder from analysts and investors for further measures from Beijing to support the economy, China's central bank on Thursday completed its largest weekly injection of funds into the financial system in seven months -- a move traders saw as a substitute for a cut in banks' required reserve ratio.
The CBE had previously reduced the required reserve ratio from 14 to 12 per cent in March.
The lending rate offered to Taiwanese enterprises by Taiwanese banks in China is currently set at LIBOR plus 300-350 basis points, and if deducting the required reserve ratio of 1%, the net interest margin stands at 200-250 basis points.
The 600 basis points of required reserve ratio (RRR) hikes between January 2010 and June 2011 to a record level of 21.
As of Friday, the required reserve ratio for foreign-exchange deposits with maturities of one month to one year was reduced from 12 percent to 11.
5 percent, and increased the required reserve ratio by 200 basis points to ensure an overall tightening of monetary policy.
25% and reduce the required reserve ratio by 2 percentage points to 6 percent as of April 1, 2010.
If implemented, the move would be the boldest so far and would complement previous measures by the CBK, most notably the cuts to interest rates and the reduced required reserve ratio.
During the period, the central bank increased the required reserve ratio 15 times, by a total of 8.

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