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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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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.
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.