Importance Of Cash Reserve Ratio In Commercial Banks

The cash reserve ratio is a policy tool that is used by a country’s central bank to regulate the economic conditions within it. The policy is meant to either increase or decreases the supply of money in the economy. Commercial banks operate under the premise of holding reserves of cash that have been deposited by their customers in their vaults so to speak. The Central Bank in any country holds a portion of this money as security within their walls for the commercial banks (Cato, 2008). It is a measure that helps the Central Bank maintains watch of the operations of various commercial banks within their jurisdiction. It can be a method for ensuring responsible practices are upheld and that the commercial banks do not take liberties with their customers’ money.
The cash reserve ratio is taken as a value of the entire deposits that the commercial bank in question holds and this would differ from bank to bank depending on the total amount. This figure is set by the central regulatory body which in the US would be the Federal Reserve and is a legal obligation to any commercial bank doing business within the country. It is usually defined as a percentage as this gives the regulatory body an easier time in ensuring uniformity and fairness in the contribution made. The cash reserve ratio includes both …show more content…
The implication in most cases is when the banks are either given a lower requirement rate and a higher requirement rate. Federal Reserve may allow more or less leveraging with regards to the capital available to the commercial banks (Rochon, L.-P, & Olawoye, 2012). The assets being analyzed are divided into various classes and are then given weights depending on the risk they pose. The Federal Reserve will then come to a conclusion on the level of capital requirement needed for the