Reserve Requirements. Резервные требования

To understand the way a central bank can influence the money supply we should consider the creation of money by commercial banks and in this connection introducethe money multiplier.

Banks have to hold a proportion of their assets as a reserve in case customers demand repayment of their deposits. This required reserve has to be in a liquid form, that is easily convertible into cash. Many banks indeed hold a significant proportion of this reserve as notes and coin either in their vaults or at the central bank. A required reserve ratio (%) is a minimum ratio of cash reserves to deposits that the central bank requires commercial banks to hold. Commercial banks can hold more than the required cash reserves (this amount of money is called excess reserves and is used to create new money), but they cannot hold less. If their cash falls below the required amount, they must immediately borrow cash, usually from the central bank, to restore their required reserve ratio.

Commercial banks can make loans, i.e. they can create money and increase their excess reserves. Suppose somebody deposited $100 with bank A. If a required reserve ratio is 20%, the bank has $20 as required reserves and $80 as excess reserves, which can be lended. If a borrower draws a cheque for this whole sum and deposits it with bank B, then bank В gets $80 as its assets. Bank В is to hold 20% of this sum (that is $16) as required reserves. It means it has $64 of excess reserves, which it can lend to somebody. Tabl. 8 illustrates the process with banks C, D, E, etc. being involved.

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