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The reserve require ments (or cash reserve ratio) is a state bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. It would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank. The reserve ratio is sometimes used as a tool in the monetary policy, influencing the country's economy, borrowing, and interest rates. Western central banks rarely alter the reserve requirements because it would cause immediate liquidity problems for banks with low excess reserves; they prefer to use open market operations to implement their monetary policy. The People's Bank of China uses changes in reserve requirements as an inflation- fighting tool, and raised the reserve requirement nine times in 2007. As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply "M1"), and zero on time deposits and all other deposits. An institution that holds reserves in excess of the required amount is said to hold excess reserves.
 Effects on money supply
MS = MB * mm mm = (1 + c) / (c + R)
MS = Money Supply Mb = Monetary base mm = money multiplier c = rate at which people hold cash (as opposed to depositing it) R = the reserve requirement (the percent of deposits that banks are not allowed to lend) if banks only have to hold 10% of deposits,they will lend the other 90% of deposits. The person with that loan will then choose to deposit the money from the loan back into the bank at a rate of 'c' (for simplicity say c=0%.) then the bank can again loan 90% of the second deposit which was 90% of the first deposit.
In contrast. In 1998 the average cash reserve ratio across the entire United Kingdom banking system was 3. a narrowly defined measure of money..90+. the bank receiving that deposit can lend out $81. the Board of Governors of the Federal Reserve System requires zero percent (0%) fractional reserves from depository institutions having net transactions accounts of up to $10. with a 20% reserve requirement. based on 2003 survey of CBC participants at the Study Center Gerzensee): Country Required reserve Note ." respectively.Reserve requirements affect the potential of the banking system to create transaction deposits. which are components of M1. For these account classes.. these numbers do not apply to time deposits from domestic corporations. Depository institutions having over $10. As the process continues. a bank that receives a $100 deposit may lend out $90 of that deposit. or deposits from foreign corporations or governments. depository institutions having over $55. higher reserve requirements reduce money creation and help maintain the purchasing power of the currency previously in use. and up to $55.000. Reserve requirements in the US apply only to transaction accounts. Because of the exponential impact that reserve requirements have on the money supply. such as savings accounts and time deposits such as CDs. Finally.$100/0.2 million in net transaction accounts must have fractional reserves totaling ten percent (10%) of that amount..000).  The Bank of England holds to a voluntary reserve ratio system.10=$1. the Federal reserve does not frequently change reserve requirements for the purpose of affecting monetary policy. However. Pinar Yesin. the fractional reserve requirement is zero percent (0%) regardless of net account value.7 million.7 million. If the borrower then writes a check to someone who deposits the $90. Thus. the banking system can expand the change in excess reserves of $90 into a maximum of $1.=$500).20+. the banking system would be able to expand the initial $100 deposit into a maximum of ($100+$80+$64+$51. In the United States.2 million in net transaction accounts must have fractional reserves totaling three percent (3%) of that amount. for example. called "nonpersonal time deposits" and "eurocurrency liabilities. Other countries have required reserve ratios (or RRRs) that are statutorily enforced (sourced from Lecture 8. and the large time lag between their implementation and the corresponding effect of inflation. e.20=$500.=$1. under current policy..g. by Dr. have no reserve requirements and therefore can expand without regard to reserve levels.g. Slide 4: Central Banking and the Money Supply.1%. If the reserve requirement is 10%.$100/0. The cash reserve ratio is also known as the cash asset ratio or liquidity ratio. e.000 of money ($100+$90+81+$72. University of Zurich.  Reserve ratios A cash reserve ratio (or CRR) is the percentage of bank reserves to deposits and notes. Deposits that are components of M2 and M3 (but not M1).
effective from 2010-02-25.00 10.00 8.00 2.00 2.00 15.00 8.5 .00 15. replaced with 1% Non-callable Deposits 1999 as per RBI.00 15. effective from 2009-01-14 Rate is for major Chinese Banks.00 14. Small and medium-size banks have a lower rate of 13.00 5.0 9. Effective from 15 May 2010 Since 1 November 2008 Raised from 8%.50 3.00 12.50 2.(in %) Australia Canada Mexico New Zealand Sweden United Kingdom Czech Republic Eurozone South Africa Switzerland Poland Chile India Bangladesh Lithuania Pakistan Latvia Jordan Malawi Zambia Burundi Hungary Ghana United States Sri Lanka Bulgaria Croatia Costa Rica Estonia China Hong Kong Tajikistan None None None None None None 2.00 8.75 5.00 8.50 18.00.50 5.50 6.50 2.00 16.00 4. effective from 2007-01-09 Down from 17%.00 20.00 10. Raised from 5. up from 16%.00 Since 7 October Statutory Reserve Deposits abolished in 1988.
.Suriname Lebanon Brazil 25. also called Capital to Risk (Weighted) Assets Ratio (CRAR).5 15.1 8.) This article needs attention from an expert on the subject. (November 2008) Capital adequacy ratio (CAR).  Formula Capital adequacy ratios ("CAR") are a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures.up and so provides a lesser degree of protection to depositors.0 3.9 United States 12.9 5. a common requirement for regulators conforming to the Basel Accords) is set by the national banking regulator.00 43.8 18.0 Germany 19. Capital adequacy ratio is defined as where Risk can either be weighted assets () or the respective national regulator's minimum total capital requirement. If using risk weighted assets. which can absorb losses in the event of a winding.7 30.5 10.00 30.3 62. The percent threshold (8% in this case.3 17.2 11.3 (Ratios are expressed in percentage points.00 Down from 27%. WikiProject Economics or the Economics Portal may be able to help recruit an expert. See the talk page for details.3 10. ≥ 8%. and tier two capital (T2 above).1 Turkey 58. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss  and are complying with their statutory capital requirements. the cash reserve ratios have decreased over time (sourced from IMF Financial Statistic Yearbook): Country 1968 1978 1988 1998 United Kingdom 20. effective from 2007-01-01   In some countries.0 19. Two types of capital are measured: tier one capital (T1 above). is a ratio of a bank's capital to its risk. which can absorb losses without a bank being required to cease trading.
consisting of: Cash: 10 units. The specifics of CAR calculation vary from country to country. there is a better likelihood the corporation will pay off its bond than that a homeowner will pay off his mortgage. the loans that bank customers have to pay back to the bank -. Bank "A" has assets totaling 100 units. banks do not have to hold so much in reserves if their "assets" (the loan dollars owed to them) are very safe (i.e. but general approaches tend to be similar for countries that apply the Basel Accords.e. in other words.  Risk weighting example Local regulations establish that cash and government bonds have a 0% risk weighting. government debt is allowed a 0% "risk weighting" . CAR primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets. All other types of assets (loans to customers) have a 100% risk weighting. For example.  Risk weighting Since different types of assets have different risk profiles. Therefore the capital adequacey ratio is equivalent to the proportion of Capital (generally what shareholders paid to the bank to purchase common stock. highly likely to be paid back). if the bank buys and holds a bond from a corporation. but Capital may also include other types of securities issuances) to the "assets" it hold on its books (i. It is important to note that the assets of a bank are its outstanding loans (not the deposits it has taken in). . In accounting generally. CAR is similar to leverage. which protect the bank's depositors or other lenders. operational risk. Banking regulators in most countries define and monitor CAR to protect depositors. In the most basic application. Use Capital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting the time liabilities and other risk such as credit risk. etc. In the most simple formulation. total assets are by definition equal to debt plus equity. a bank's capital is the "cushion" for potential losses. and residential mortgage loans have a 50% risk weighting. thereby maintaining confidence in the banking system. CAR recognizes that assets can have different levels of risk.such as a home mortgage).that is. however. it is comparable to the inverse of debt-to-equity leverage formulations: CAR uses equity divided by assets instead of debt-to-equity (total debt divided by shareholder's equity or other invested capital). they are subtracted from total assets for purposes of calculating the CAR. The "safer" the asset the more the bank is allowed to discount that asset in its CAR calculation. Unlike traditional leverage. in the most basic formulation. Government bonds: 15 units.
or equity-toassets of only 5%. while minimum CAR including Tier II capital may be 8%. To recognize this. equity is equal to assets minus debt.  See also Bank regulation Capital Requirement Fractional. Bank "A" has deposits of 95 units.  Types of capital The Basel rules recognize that different types of equity are more important than others.69% Even though Bank "A" would appear to have a debt-to-equity ratio of 95:5. Other loans: 50 units. Different minimum CAR ratios are applied: minimum Tier I equity to risk-weighted assets may be 4%.reserve banking . different adjustments are made: 1. Bank A's risk-weighted assets are calculated as follows: Cash Government bonds Mortgage loans Other loans Other assets 10 * 0% = 0 15 * 0% = 0 20 * 50% = 10 50 * 100% = 50 5 * 100% = 5 Total risk Weighted assets 65 Equity 5 CAR (Equity/RWA) 7. its CAR is substantially higher. There is usually a maximum of Tier II capital that may be "counted" towards CAR. 2. It is considered less risky because some of its assets are less risky than others. Tier I Capital: Actual contributed equity plus retained earnings. all of which are deposits (remember: "deposits" to a bank are its "debt"). or 5 units. Other assets: 5 units. Mortgage loans: 20 units. depending on the jurisdiction. Tier II Capital: Preferred shares plus 50% of subordinated debt. By definition.
Batson. Full-reserve banking Islamic banking Monetary policy of central banks Money creation Money supply Statutory Liquidity Ratio Tier 1 capital Tier 2 capital Basel accords  References 1.bbc.html? mod=WSJ_hps_LEFTWhatsNews. BBC News. 2007-11-11.CAR". http://www.Federal Reserve Bank of New York Reserve Requirements . Andrew (2010-02-12). Reserve Bank of New Zealand.sr/english/publicaties-reserve. Retrieved 2007-0710.investopedia.asp. ^ Poon. http://news. ^ "Capital adequacy ratios for banks . 10.co.asp?file=policy_e.cbr. "China's Bank Moves Jolt Markets". Capital Adequacy Ratio at The Reserve Bank of New Zealand's website. Investopedia. ^ "Reserve base en Kasreserve". ^ a b c d Reserve Requirements of Depository Institutions in February 2008 Statistical Supplement to the Federal Reserve Bulletin. The Wall Street Journal. ^ "China moves to cool its inflation". ^ a b c "Capital Adequacy Ratio . ^ "Inquiry into the Australian Banking Industry.htm. Reserve Bank of Australia. Terence.com/terms/c/capitaladequacyratio. ^ http://www.stm. ^  (in Croatian) 7. Table 1. http://www.The Federal Reserve Board Hussman Funds .Fedpoints . 3. 9. 8.simplified explanation and example of calculation".nz/finstab/banking/regulation/0091769.govt. January 1991 6.15 4. http://online. Reserve Requirements .Why the Federal Reserve is Irrelevant .ru/eng/analytics/standart_system/print.August 2001 Don't mention the reserve ratio [show] v • d• e Central banks . http://www. Centrale Bank van Suriname.  External links Capital Adequacy Ratio at Investopedia.rbnz.html 2. Retrieved 2007-07-10. Retrieved 2009-12-21.cbvs. Pinar Yesin 5.wsj.html.uk/1/hi/business/7089307.com/article/SB10001424052748703525704575060813470407750. ^ Monetary Macroeconomics by Dr.
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Please help improve it or discuss these issues on the talk page.Norges Bank · Polish National Bank · National Bank of Romania · Central Bank of Russia · National Bank of Serbia · Sveriges Riksbank · Swiss National Bank · Central Bank of the Republic of Turkey · National Bank of Ukraine [show] Policies and implementation Expansionary monetary policy · Policies Contractionary monetary policy · Capital requirement Open market operations · Capital control · Discount rate · Money Implementation creation · Interest rates · Sovereign wealth fund [show] Bretton Woods system Retrieved from "http://en.wikipedia. the free encyclopedia Jump to: navigation.org/wiki/Reserve_requirement" Categories: Banking | Monetary policy | Financial ratios | Financial economics Hidden categories: Wikipedia articles needing style editing from July 2007 | All articles needing style editing | Wikipedia articles needing clarification from July 2007 | Economics articles needing expert attention | Articles needing expert attention from November 2008 | All articles needing expert attention Statutory Liquidity Ratio From Wikipedia. search This article has multiple issues. .
To ensure solvency of banks. 3. The SLR is commonly used to contain inflation and fuel growth. When measured in rupees. It does not have a lead section. This counter acts by decreasing or increasing the money supply in the system respectively. While the recent credit boom is a key driver of the decline in banks’ portfolios of G-Sec. . 2. To restrict the expansion of bank credit. such holdings decreased for the first time in a little less than 40 years (since the nationalisation of banks in 1969) in 2005-06. Indian banks’ holdings of government securities (Government securities) are now close to the statutory minimum that banks are required to hold to comply with existing regulation. that a financial institution must maintain in its reserves. Interest rate increases. such as cash. These include: 1. Changes in the prudential regulation of banks’ investments in G-Sec. Tagged since March 2010. Definition: Statutory Liquidity Ratio is the amount of liquid assets. The statutory liquidity ratio is a term most commonly used in India Contents [hide] 1 Objective 2 Value and Formula 3 Difference between SLR & CRR 4 See also 5 References 6 Further reading  Objective The objectives of SLR are: 1. To augment the investment of the banks in Government securities. A reduction of SLR rates looks eminent to support the credit growth in India. 2. precious metals or other short-term securities. by increasing or decreasing it respectively. other factors have played an important role recently.
gold or approved securities whereas with CRR it has to be only cash. The maximum and minimum limits for the SLR are 40% and 25% respectively. SLR & Repo rates. 2009. the floor rate of 25% for SLR was removed. Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around 108000 crore rupees in the financial system.pdf . Increasing interest rates have eroded banks’ income from trading in GSec. CRR.  Difference between SLR & CRR SLR restricts the bank’s leverage in pumping more money into the economy. the liabilities of the bank which are payable on demand anytime. It was raised from 24% in the RBI policy review on 27 October.org. which are sensitive to changes in interest rates. whereas SLR is maintained in liquid form with banks themselves. The other difference is that to meet SLR. CRR is maintained in cash form with RBI.  Value and Formula The quantum is specified as some percentage of the total demand and time liabilities ( i. SLR Rate = Total Demand/Time Liabilities x 100% This percentage is fixed by the Reserve Bank of India. ^ Master Circular of RBI to banks http://rbidocs.in/rdocs/notification/PDFs/55663. or Cash Reserve Ratio. On the other hand. Banks invested almost 70% of this money to rather safe Govt securities than lending it to corporates. the SLR is 25% with effect from 7 November. However the exercise became futile with banks being over cautious of lending in highly shaky market conditions. Providing economy with the much needed fuel of liquidity to maintain the pace of growth rate.  Following the amendment of the Banking regulation Act(1949) in January 2007.e. is the portion of deposits that the banks have to maintain with the Central Bank. This was to increase lending by the banks to the corporates and resolve liquidity crisis. banks can use cash. and those liabilities which are accruing in one months time due to maturity) of a bank. Presently.  See also Cash Reserve Ratio  References 1.Most G-Sec held by banks are long-term fixed-rate bonds. This was by reducing CRR. 2009.rbi.
Retrieved from "http://en.com/Features/The_Sunday_ET/Money__You/Sta tutory_Liquidity_Ratio/articleshow/3718262. http://economictimes.indiatimes.cms. Mansi (16 November 2008). "Statutory Liquidity Ratio". Further reading Tiwari.wikipedia. The Economic Times.org/wiki/Statutory_Liquidity_Ratio " Categories: Banking | Monetary policy | Financial ratios | Financial economics Hidden categories: Articles needing cleanup from March 2010 | Wikipedia introduction cleanup from March 2010 .
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