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.
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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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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.

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References in periodicals archive ?
The reduction in the reserve requirement ratio of banks to 18 percent from 19 percent starting June 1, the second in three months, is set to release close to P100 billion in fresh funds that may be used by banks to lend more to sustain the country's growing economy.
The gradual and phased reduction of the reserve requirement ratio as envisioned by BSP Governor Nestor Espenilla Jr.
'The reserve requirement ratio is one of the traditional monetary policy instruments available to BSP.
He said that China could opt for more reserve requirement ratio cuts to improve lending by banks and try and halt the slowdown in the economy.
Guinigundo said monetary authorities are reviewing their inflation and growth forecasts to factor in latest developments with the impending cut in the reserve requirement ratio (RRR).
The economist added that the strength of the economy is such that it no longer requires accommodative monetary policy, especially in light of looming cuts to the reserve requirement ratio.
Investors unloaded shares as worries were fueled by an announcement Tuesday by the People's Bank of China that it will raise the reserve requirement ratio by half a percentage point to 15 percent, effective Monday.
In a separate research note, British banking giant HSBC said risks of slower growth this year might prompt some monetary loosening in the form of reserve requirement ratio cuts by as much as 300 basis points to 15 percent.
The BSP has slashed the ultrahigh reserve requirement ratio by 200 basis points to 18 percent from 20 percent this year.
However, he said the BSP should be encouraged to reduce the reserve requirement ratio (RRR) on deposits of commercial and universal banks which is currently at 18 percent, the highest among the ASEAN-5 countries that include Indonesia, Malaysia, Singapore and Thailand.
'Cutting the reserve requirement ratio by 200 basis points this year already sends a credible and concrete signal to the financial system of BSP commitment to structural reforms so the industry can be guided accordingly in developing their long-term strategic plans,' Espenilla said.
The central bank said the reserve requirement ratio (RRR) would be cut by 0.5 of a percentage point to 16.5 percent.