If the desired reserve ratio is 7 percent and a bank has $10,000 of deposits, then its desired reserves are $700.
A reserve requirement is a rule established by the central bank that specifies the minimal amount of liquid assets that a commercial bank must retain. The reserve ratio is essential to understanding how much credit money banks can generate by lending out deposits under fractional reserve banking. A bank must keep $50 million, or 10%, in reserve, for instance, if it has $500 million in deposits.
The country's central bank, in the instance of the United States, the Federal Reserve, determines the reserve ratio requirement. The calculation for a bank can be obtained by dividing the bank deposits by the cash reserve held with the central bank, and it is expressed as a percentage.
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