Reserve Ratio Calculator
This simple reserve ratio calculator helps you quickly compute the reserve ratio of a given bank or the economy. Our reserve ratio calculator can also teach how a bank's deposits, loans, and reserves are related.
Read further, and we will show you how to calculate the reserve ratio. We will also cover content such as:
- What is the reserve ratio?
- How to calculate the required reserve ratio (formula);
- How to calculate money supply with reserve ratio; and
- How to calculate money multiplier with reserve ratio.
What is the reserve ratio?
The reserve ratio is the fraction of total deposits that a bank keeps as reserves. Typically, central banks set the minimum amount of reserves (reserve requirement) that banks are obliged to hold. However, reserves may exceed the legal minimum (excess reserves) when banks want to be more secured with liquidity; for example, they will not run short of cash.
What is fractional reserve banking?
Fractional reserve banking refers to a banking system in which banks must hold a minimum fraction of deposits as reserves (and lend out the rest) to ensure stability in the banking sector and to provide a tool for monetary policy.
How money supply, money multiplier and the reserve ratio are related?
In a fractional reserve banking system, the below equation may approximate the relationship between the money supply, money multiplier, and the reserve ratio. Note that in the case of zero (or a very small) reserve ratio, the below equation is not applicable. This mechanical relation may represent the upper limit of change in the money supply and not necessarily reflect the actual change in money supply, which eventually depends on the financial institutions lending behavior and the private sectors' demand for loans.
If you want to learn more, check our money multiplier calculator, where we explain the money creation process according to the fractional reserve theory.
Change in the money supply = Increase in loanable deposit / Reserve Ratio.
How to apply the reserve ratio calculator
The present tool includes four variables; you need only to provide two parameters, and the two others will be determined simultaneously.
- Deposits: the amount of money deposited in a given bank or the whole banking system.
- Reserves: the part of the deposit a bank keeps as reserves.
- Reserve ratio: the ratio of reserves to the total deposits.
- Loanable funds: the part of the deposit that the bank can lend out.
Note that the sum of reserves and loans must equal the total deposits.
For example, let's say that the bank's total deposit is $1,000 million and assume there is a required reserve ratio of 10%. In such a case, the bank must keep at least 10% of the total deposit as reserves, which means the bank has in its possession $100 million, which it cannot use for lending purposes but must keep as reserves.
How to calculate required reserve ratio. The reserve ratio formula
Assuming that a bank's total deposit is $1,000 million and it holds $100 million in reserves. Now, let's suppose that the bank precisely fulfills the reserve obligations determined by the regulations. In this particular case, the required reserve ratio is 10. You can easily see if you check the below formula.
Required reserve ratio = Reserves / Total deposits = $100 million / $1,000 million = 0.1 = 10%
What is the reserve requirement ratio?
The reserve requirement ratio, regulated by the Federal Reserve, is the percentage of total deposits held by depository institutions. For example, if the required reserve ratio is 10, a bank must keep $0.10 of each dollar in reserves from its deposit and can lend out $0.90 of each dollar.
Can the reserve requirement ratio be zero?
Yes. In fact, as of March 26, 2020, the reserve requirement ratio was set to zero percent by the Federal Reserve of the United States. This action eliminated reserve requirements for all depository institutions.
How can I compute the reserve ratio?
To compute the reserve ratio, you need to take the following steps.
- Determine the total deposits.
- Check the total reserves.
- Divide the reserves by the total deposits to obtain the reserve ratio.
What is the reserve ratio if there is no reserves?
The reserve ratio is zero if a given bank does not hold reserves. It means that the bank lent out all its deposits.