Reserve requirement ratio, also known as the reserve ratio or statutory reserve requirement, is an important regulatory requirement imposed by the central bank on commercial banks and other financial institutions. Specifically, it refers to the proportion of deposits that financial institutions must keep with the central bank as reserves, in accordance with the ratio stipulated by the central bank. These reserves cannot be used at will, but serve as a guarantee for financial institutions to meet customer withdrawal and fund settlement needs, preventing bank runs. The change in its level will directly affect the bank's ability to lend and invest. For example, if the central bank requires a reserve ratio of 20%, the bank can use the remaining 80% of its deposits for lending or investment.
Significance of Required Reserve Ratio
Maintaining financial stability: Reserve requirements ensure that banks have sufficient funds at all times to meet customer withdrawal needs, effectively preventing the risk of bank runs. Reserve requirements provide the basis for interbank fund settlement, ensuring the efficient operation of the payment system.
Regulating money supply: By adjusting the reserve requirement ratio, the central bank can influence the lending capacity of commercial banks, thereby regulating the money supply in the market. Increasing the reserve requirement ratio reduces the loanable funds of banks and curbs credit expansion; decreasing the reserve requirement ratio has the opposite effect. By regulating the money supply, the reserve requirement ratio policy helps stabilize price levels and prevent inflation or deflation.
Guiding the behavior of financial institutions: A higher reserve requirement ratio will encourage financial institutions to pay more attention to risk management and improve their capital adequacy ratio, thereby enhancing the robustness of the financial system.
Preventing systemic risks: As a macroprudential management tool, the reserve requirement ratio can help the central bank monitor and assess the risk status of the financial system and take timely measures to prevent the occurrence of systemic financial risks.
The reserve requirement ratio plays a crucial role in maintaining financial stability, regulating the money supply, guiding the behavior of financial institutions, and preventing systemic risks. It is one of the key tools for the central bank to achieve its macroeconomic regulation goals.
