Banking: Understanding Reserve Ratios

Reserve requirements are the amount of funds that a bank must hold in reserve against specified deposit liabilities.

The dollar amount of a depository institution’s reserve requirement is determined by applying the reserve ratios specified by the central bank of a country. This is also referred to as the “cash reserve ratio” (CRR).

The reserve ratio affects the money supply in a country.

This video explains the concept of reserve ratio and how reserve requirements limit how much lending a bank can do.