reserve asset ratio

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reserve asset ratio


liquidity ratio

the proportion of a COMMERCIAL BANK's total assets that it keeps in the form of liquid assets to meet day-to-day currency withdrawals by its customers and other financial commitments. In Britain, assets held as part of a bank's reserve asset ratio include: TILL MONEY (bank notes and coins)

and BALANCES WITH THE BANK OF ENGLAND, which together comprise the CASH RESERVE RATIO; CALL MONEY (short-term deposits with the DISCOUNT MARKET); and near-mature BILLS OF EXCHANGE and TREASURY BILLS.

The ratio of liquid assets to total assets held can be dictated by reasons of commercial prudence to maintain customers’ confidence in the banks’ ability to repay their deposits on demand. This is a matter of individual discretion. In some countries, however, the monetary authorities prescribe mandatory and uniform minimum reserve-asset ratios for the banking sector. This is because the reserve-asset ratio of the banking sector determines the number of new bank deposits that can be created and, hence, has an important influence on the size of the MONEY SUPPLY. See also BANK DEPOSIT CREATION, MONETARY POLICY, OPEN MARKET OPERATIONS.

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