

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[1]. 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,[2] 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.

[edit] 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.
Reserve requirements affect the potential of the banking system to create transaction
deposits. If the reserve requirement is 10%, for example, a bank that receives a $100
deposit may lend out $90 of that deposit. If the borrower then writes a check to someone
who deposits the $90, the bank receiving that deposit can lend out $81. As the process
continues, the banking system can expand the change in excess reserves of $90 into a
maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000),
e.g.$100/0.10=$1,000. In contrast, with a 20% reserve requirement, the banking system
would be able to expand the initial $100 deposit into a maximum of
($100+$80+$64+$51.20+...=$500), e.g.$100/0.20=$500. Thus, higher reserve
requirements reduce money creation and help maintain the purchasing power of the
currency previously in use.

Reserve requirements in the US apply only to transaction accounts, which are

components of M1, a narrowly defined measure of money. Deposits that are components
of M2 and M3 (but not M1), such as savings accounts and time deposits such as CDs,
have no reserve requirements and therefore can expand without regard to reserve levels.

Because of the exponential impact that reserve requirements have on the money supply,
and the large time lag between their implementation and the corresponding effect of
inflation, the Federal reserve does not frequently change reserve requirements for the
purpose of affecting monetary policy.

[edit] Reserve ratios

A cash reserve ratio (or CRR) is the percentage of bank reserves to deposits and notes.
The cash reserve ratio is also known as the cash asset ratio or liquidity ratio. In the
United States, 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 $10.7 million.[3] Depository institutions having over $10.7 million, and
up to $55.2 million in net transaction accounts must have fractional reserves totaling
three percent (3%) of that amount.[3] Finally, depository institutions having over $55.2
million in net transaction accounts must have fractional reserves totaling ten percent
(10%) of that amount.[3] However, under current policy, these numbers do not apply to
time deposits from domestic corporations, or deposits from foreign corporations or
governments, called "nonpersonal time deposits" and "eurocurrency liabilities,"
respectively. For these account classes, the fractional reserve requirement is zero percent
(0%) regardless of net account value. [3]

The Bank of England holds to a voluntary reserve ratio system. In 1998 the average cash
reserve ratio across the entire United Kingdom banking system was 3.1%. Other
countries have required reserve ratios (or RRRs) that are statutorily enforced (sourced
from Lecture 8, Slide 4: Central Banking and the Money Supply, by Dr. Pinar Yesin,
University of Zurich, based on 2003 survey of CBC participants at the Study Center
Gerzensee[4]):

Country Required reserve Note

 (in %)
Statutory Reserve Deposits abolished in 1988,
Australia None
replaced with 1% Non-callable Deposits[5]
Canada None
Mexico None
New Zealand None 1999[2]
Sweden None
United
None
Kingdom
Czech
2.00 Since 7 October
Republic
Eurozone 2.00
South Africa 2.50
Switzerland 2.50
Poland 3.00
Chile 4.50
India 5.75 as per RBI.
Bangladesh 5.50 Raised from 5.00. Effective from 15 May 2010
Lithuania 6.00
Pakistan 5.00 Since 1 November 2008
Latvia 8.00
Jordan 8.00
Malawi 15.00
Zambia 8.00
Burundi 8.50
Hungary 2.0
Ghana 9.00
United States 10.00
Sri Lanka 10.00
Bulgaria 12.00 Raised from 8%, effective from 2007-01-09
Croatia 14.00 Down from 17%, effective from 2009-01-14[6]
Costa Rica 15.00
Estonia 15.00
Rate is for major Chinese Banks, up from 16%,
effective from 2010-02-25[7].
China 16.50
Small and medium-size banks have a lower rate of
13.5
Hong Kong 18.00
Tajikistan 20.00
 Suriname 25.00 Down from 27%, effective from 2007-01-01[8]
Lebanon 30.00 [3]
Brazil 43.00 [4]

In some countries, the cash reserve ratios have decreased over time (sourced from IMF
Financial Statistic Yearbook):

Country 1968 1978 1988 1998

United Kingdom 20.5 15.9 5.0 3.1
Turkey 58.3 62.7 30.8 18.0
Germany 19.0 19.3 17.2 11.9
United States 12.3 10.1 8.5 10.3

(Ratios are expressed in percentage points.)

This article needs attention from an expert on the subject. See the talk page for
details. WikiProject Economics or the Economics Portal may be able to help recruit an
expert. (November 2008)

Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio
(CRAR)[9], is a ratio of a bank's capital to its risk. National regulators track a bank's CAR
to ensure that it can absorb a reasonable amount of loss [10] and are complying with their
statutory capital requirements.

[edit] 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.

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,

≥ 8%.[9]

The percent threshold (8% in this case, a common requirement for regulators conforming
to the Basel Accords) is set by the national banking regulator.

Two types of capital are measured: tier one capital (T1 above), which can absorb losses
without a bank being required to cease trading, and tier two capital (T2 above), which can
absorb losses in the event of a winding- up and so provides a lesser degree of protection to
depositors.
[edit] 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, operational risk, etc. In the
most simple formulation, a bank's capital is the "cushion" for potential losses, which
protect the bank's depositors or other lenders. Banking regulators in most countries define
and monitor CAR to protect depositors, thereby maintaining confidence in the banking
system.[9]

CAR is similar to leverage; in the most basic formulation, 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). 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, total assets are by definition equal to debt plus equity.
Therefore the capital adequacey ratio is equivalent to the proportion of Capital (generally
what shareholders paid to the bank to purchase common stock, but Capital may also
include other types of securities issuances) to the "assets" it hold on its books (i.e. the
loans that bank customers have to pay back to the bank -- such as a home mortgage).
Unlike traditional leverage, however, CAR recognizes that assets can have different
levels of risk. The "safer" the asset the more the bank is allowed to discount that asset in
its CAR calculation; in other words, banks do not have to hold so much in reserves if
their "assets" (the loan dollars owed to them) are very safe (i.e. highly likely to be paid
back). For example, if the bank buys and holds a bond from a corporation, there is a
better likelihood the corporation will pay off its bond than that a homeowner will pay off
his mortgage.

[edit] Risk weighting

Since different types of assets have different risk profiles, CAR primarily adjusts for
assets that are less risky by allowing banks to "discount" lower-risk assets. The specifics
of CAR calculation vary from country to country, but general approaches tend to be
similar for countries that apply the Basel Accords. In the most basic application,
government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total
assets for purposes of calculating the CAR.

[edit] Risk weighting example

Local regulations establish that cash and government bonds have a 0% risk weighting,
and residential mortgage loans have a 50% risk weighting. All other types of assets (loans
to customers) have a 100% risk weighting.

Bank "A" has assets totaling 100 units, consisting of:

 Cash: 10 units.
 Government bonds: 15 units.
  Mortgage loans: 20 units.
 Other loans: 50 units.
 Other assets: 5 units.

Bank "A" has deposits of 95 units, all of which are deposits (remember: "deposits" to a
bank are its "debt"). By definition, equity is equal to assets minus debt, or 5 units.

Bank A's risk-weighted assets are calculated as follows:

Cash 10 * 0% = 0
Government bonds 15 * 0% = 0
Mortgage loans 20 * 50% = 10
Other loans 50 * 100% = 50
Other assets 5 * 100% = 5
Total risk
Weighted assets 65
Equity 5
CAR (Equity/RWA) 7.69%

Even though Bank "A" would appear to have a debt-to-equity ratio of 95:5, or equity-to-
assets of only 5%, its CAR is substantially higher. It is considered less risky because
some of its assets are less risky than others.

[edit] Types of capital

The Basel rules recognize that different types of equity are more important than others.
To recognize this, different adjustments are made:

1. Tier I Capital: Actual contributed equity plus retained earnings.

2. Tier II Capital: Preferred shares plus 50% of subordinated debt.

Different minimum CAR ratios are applied: minimum Tier I equity to risk-weighted
assets may be 4%, while minimum CAR including Tier II capital may be 8%.

There is usually a maximum of Tier II capital that may be "counted" towards CAR,
depending on the jurisdiction.

[edit] See also

 Bank regulation
 Capital Requirement
 Fractional- reserve banking
  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

[edit] References
1. ^ http://www.cbr.ru/eng/analytics/standart_system/print.asp?file=policy_e.html
2. ^ "China moves to cool its inflation". BBC News. 2007-11-11.
http://news.bbc.co.uk/1/hi/business/7089307.stm.
3. ^ a b c d Reserve Requirements of Depository Institutions in February 2008 Statistical
Supplement to the Federal Reserve Bulletin, Table 1.15
4. ^ Monetary Macroeconomics by Dr. Pinar Yesin
5. ^ "Inquiry into the Australian Banking Industry, Reserve Bank of Australia, January
1991
6. ^ [1] (in Croatian)
7. ^ Poon, Terence; Batson, Andrew (2010-02-12). "China's Bank Moves Jolt Markets".
The Wall Street Journal.
http://online.wsj.com/article/SB10001424052748703525704575060813470407750.html?
mod=WSJ_hps_LEFTWhatsNews.
8. ^ "Reserve base en Kasreserve". Centrale Bank van Suriname.
http://www.cbvs.sr/english/publicaties-reserve.htm. Retrieved 2009-12-21.
9. ^ a b c "Capital Adequacy Ratio - CAR". Investopedia.
http://www.investopedia.com/terms/c/capitaladequacyratio.asp. Retrieved 2007-07-10.
10. ^ "Capital adequacy ratios for banks - simplified explanation and example of
calculation". Reserve Bank of New Zealand.
http://www.rbnz.govt.nz/finstab/banking/regulation/0091769.html. Retrieved 2007-07-
10.

[edit] External links

 Capital Adequacy Ratio at Investopedia.
 Capital Adequacy Ratio at The Reserve Bank of New Zealand's website.
 Reserve Requirements - Fedpoints - Federal Reserve Bank of New York
 Reserve Requirements - The Federal Reserve Board
 Hussman Funds - Why the Federal Reserve is Irrelevant - August 2001
 Don't mention the reserve ratio

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Statutory Liquidity Ratio

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  It does not have a lead section. Tagged since March 2010.

Definition: Statutory Liquidity Ratio is the amount of liquid assets, such as cash,
precious metals or other short-term securities, that a financial institution must maintain in
its reserves. 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

[edit] Objective
The objectives of SLR are:

1. To restrict the expansion of bank credit.

2. To augment the investment of the banks in Government securities.
3. To ensure solvency of banks. A reduction of SLR rates looks eminent to support
the credit growth in India.

The SLR is commonly used to contain inflation and fuel growth, by increasing or
decreasing it respectively. This counter acts by decreasing or increasing the money
supply in the system respectively. 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. When measured in rupees, such holdings
decreased for the first time in a little less than 40 years (since the nationalisation of banks
in 1969) in 2005-06.

While the recent credit boom is a key driver of the decline in banks’ portfolios of G-Sec,
other factors have played an important role recently.

These include:

1. Interest rate increases.

2. Changes in the prudential regulation of banks’ investments in G-Sec.
Most G-Sec held by banks are long-term fixed-rate bonds, which are sensitive to changes
in interest rates. Increasing interest rates have eroded banks’ income from trading in G-
Sec.

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. This was by reducing CRR, SLR &
Repo rates. This was to increase lending by the banks to the corporates and resolve
liquidity crisis. Providing economy with the much needed fuel of liquidity to maintain the
pace of growth rate. However the exercise became futile with banks being over cautious
of lending in highly shaky market conditions. Banks invested almost 70% of this money
to rather safe Govt securities than lending it to corporates.

[edit] Value and Formula

The quantum is specified as some percentage of the total demand and time liabilities ( i.e.
the liabilities of the bank which are payable on demand anytime, and those liabilities
which are accruing in one months time due to maturity) of a bank.

SLR Rate = Total Demand/Time Liabilities x 100%

This percentage is fixed by the Reserve Bank of India. The maximum and minimum
limits for the SLR are 40% and 25% respectively. [1] Following the amendment of the
Banking regulation Act(1949) in January 2007, the floor rate of 25% for SLR was
removed. Presently, the SLR is 25% with effect from 7 November, 2009. It was raised
from 24% in the RBI policy review on 27 October, 2009.

[edit] Difference between SLR & CRR

SLR restricts the bank’s leverage in pumping more money into the economy. On the
other hand, CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to
maintain with the Central Bank.

The other difference is that to meet SLR, banks can use cash, gold or approved securities
whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI,
whereas SLR is maintained in liquid form with banks themselves.

[edit] See also

Cash Reserve Ratio

[edit] References
1. ^ Master Circular of RBI to banks
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/55663.pdf
[edit] Further reading
 Tiwari, Mansi (16 November 2008), "Statutory Liquidity Ratio", The Economic
Times,
http://economictimes.indiatimes.com/Features/The_Sunday_ET/Money__You/Sta
tutory_Liquidity_Ratio/articleshow/3718262.cms.

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