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Suppose a bank has check able deposits of $100,000 and the required reserve ratio is 20 percent. if the bank currently has $100,000 in reserves, it could lend out as much as $80,000.
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 central bank often determines this minimum amount, also known as the commercial bank's reserve, based on a predetermined percentage of the bank's deposit liabilities.
The reserve ratio is a typical name for this rate. Although there are many definitions, the cash held by the commercial bank and physically kept in the bank vault (vault cash) as well as the amount of the bank's balance in that bank's account with the central bank typically make up the commercial bank's reserves.
A bank is free to keep excess reserves—a.k.a. reserves—in reserve amounts above this minimal need.
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