Reserve Ratio

Article byVivek Shah
Reviewed byDheeraj Vaidya, CFA, FRM

What is the Reserve Ratio?

The reserve ratio is the minimum percentage of the amount defined by the central bank to park aside by every commercial bank, it is a requirement that every bank must adhere to as per the regulations, and the central authority holds the right to increase or decrease this ratio as per the economic requirement.

Key Takeaways

  • The reserve ratio is the minimum percentage of funds that every commercial bank must set aside, as mandated by the Central Bank’s regulations. The central authority can adjust this ratio based on economic needs.
  • The reserve ratio is an essential factor in the financial system and can be used to balance the nation’s economy effectively.
  • When the Central Bank lowers the reserve ratio, banks are allowed more money to lend, boosting the economy. If the intention is to reduce the cash supply and keep inflation under control, on the other hand, the reserve proportion is increased.

Calculate Reserve Requirement

The simple and straightforward calculation of reserve requirement as it is directly correlated to the amount of deposits liability the bank has-

Reserve Ratio = Deposits * Reserve Requirement


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For eg:
Source: Reserve Ratio (

Example: If the European Central bankEuropean Central BankThe European Central Bank is the apex bank of the member European countries, monitoring the banking and financial functions of all member countries in order to maintain the price stability of the European currency, the more (ECB), the central bank for the banks operating in the eurozoneEurozoneThe Eurozone or Euro area is the monetary region constituting countries that have replaced their national currencies with the more, has set a reserve requirement of 8%, and a bank has deposits of 2 billion €.

So, the bank must keep 2 billion € * 8% = 160 million € as a reserve requirement.

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Reserve Requirements in the USA by Federal Bank

The below snapshot illustrates the reserve requirement by the fed for commercial banksCommercial BanksA commercial bank refers to a financial institution that provides various financial solutions to the individual customers or small business clients. It facilitates bank deposits, locker service, loans, checking accounts, and different financial products like savings accounts, bank overdrafts, and certificates of more in the USA.

Reserve Requirements in the USA by Federal Bank


  • Inside limits indicated by law, the federal reserve board of governors has the sole authority over changes available for later necessities. In January 2019, the Fed refreshed its hold necessities for storehouse establishments of various sizes.
  • Banks with more than $124.2 million in net exchange records must keep up a save of 10% of net exchange accounts.
  • Banks with more than $16.3 million to $124.2 million must save 3% of net exchange accounts.
  • Banks with net exchange records of up to $16.3 million or less don’t have a hold necessity. Most banks in the United states fall into the main class.
  • The Fed set a 0% prerequisite for nonpersonal time stores and eurocurrency liabilities.

The Functioning of Reserve Ratio

Effects of Change in Reserve Ratio

The following are the effects of change in reserve ratio.

#1 – Bank Credit and Money Stock

#2 – Interest Rate

Importance of Reserve Ratio

The following are the importance of the reserve ratio.


Reserve Ratio is a key component in the financial system and can also be used as an effective tool in balancing the monetary structure of the nation; lastly, the central bank brings down the reserve ratio to give banks more cash to loan and lift the economy and expands the reserve proportion when it needs to decrease the cash supply and control inflation.

Frequently Asked Questions (FAQs)

What is the legal reserve ratio?

The legal reserve ratio is the minimum amount of cash banks must keep on hand from the deposits they receive. The Central Bank sets this ratio.

What is the statutory reserve ratio?

The Statutory Reserve Requirement (SRR) is the number of deposit liabilities that Licensed Commercial Banks (LCBs) must keep as a cash deposit with the Central Bank. Hence, this is mandated by the Monetary Law Act (MLA), which sets rates for the reserves LCBs must maintain with the Central Bank.

What does increasing the required reserve ratio do?

When the reserve requirement ratio is increased, fewer deposits will be supported by the same amount of reserves. Therefore, this may result in a decrease in the money stock and an increase in the cost of credit unless other actions are taken.

This article has guided what the reserve ratio is and its definition. Here we calculate the reserve ratio requirement and examples, importance, and functions. You can learn more about financial analysis from the following articles –