What Is the Formula of Legal Reserve Ratio

The statutory liquidity ratio (SLR) refers to reserves in the form of cash (including (i) cash, (ii) gold and (iii) authorized securities) with the commercial banks themselves as a percentage of their total deposits. First, determine the amount of reserve held by the bank at the central bank, and it will be readily available in the disclosure published by the bank. 1. Total trading accounts include demand deposits, automatic transfer service (ATS) accounts, NOW accounts, stock accounts, pre-authorized telephone or remittance accounts, unauthorized bankers` acceptances and affiliate bonds that mature in seven days or less. Net transaction accounts are the total of operating accounts minus amounts owed by other custodian banks and minus cash items in the collection process. A more detailed description of these types of deposits can be found on Form FR 2900 under www.federalreserve.gov/apps/reportforms/default.aspx Back to table The following list includes regulatory amendments relating to reserve requirements and indexation of the low reserve tranche and reserve exemption from 1 December 1959 and their impact on reserve requirements. As the central bank focuses on a restrictive monetary policy, XYZ Bank Ltd. is therefore required to hold an additional $20 million (=$100-80 million) in cash reserves to comply with the new regime. As a simplified example, suppose the Federal Reserve has set the reserve ratio at 11%. In other words, if a bank has deposits of $1 billion, it must have $110 million in reserve ($1 billion x $0.11 = $110 million). The last time the Fed updated its reserve requirements for various deposit-taking institutions before the pandemic was in January 2019. Banks with more than $124.2 million in net transaction accounts were required to hold a reserve of 10% of net transaction accounts. Banks with revenues above $124.2 million were required to reserve 3% of net transaction accounts.

Banks with net accounts of $16.3 million or less were not required to have reserve requirements. The majority of banks in the United States belonged to the first category. The Fed has set a 0% requirement for non-personal term deposits and euro liabilities. Conversely, the Fed increases the reserve requirement to reduce the amount of funds banks must lend. The Fed uses this mechanism to reduce the money supply in the economy and control inflation by slowing the economy. Further details on the evolution of reserve ratios and the indexation of the exemption and the low reserve tranche can be found in the annual revision table. For more details on reserve requirements, see the reserve maintenance manual and the Federal Reserve Bulletin article (119 KB PDF), the appendix of which contains tables of historical reserve ratios. Note: The Board`s Regulation D (Deposit-taking Institutions Reserve Requirements) requires that reserve requirements be met by holding funds from the Consolidated Revenue Fund and, if cash is insufficient, by maintaining a balance in an account with a Federal Reserve Bank.

An institution may hold this balance directly with a reserve bank or other institution as part of an intermediary relationship. Reserve requirements apply to «deposit-taking institutions,» defined as commercial banks, savings and credit associations, credit unions, U.S. branches, and agencies of foreign banks, peripheral entities, and procuring entities. The Board of Governors of the Federal Reserve has exclusive jurisdiction over changes to reserve requirements within the limits set by law. As of 26 March 2020, the minimum reserve was set at 0%. At that time, the board removed the minimum reserve requirement due to the global financial crisis. This means that banks are not obliged to hold deposits with their reserve bank. Instead, they can use the funds to lend to their customers. The reserve requirement ratio refers to the share of total deposits that commercial banks are required to hold with the central bank in the form of cash reserves and that is not available for commercial lending. The minimum reserve requirement is set by the country`s central bank, like the Federal Reserve in the case of the United States. The calculation for a bank can be obtained by dividing the cash reserve held at the central bank by bank deposits, and it is expressed as a percentage. The calculation of the reserve ratio can be carried out by proceeding as follows: Prior to the amendment of 26 March 2020, the reserve ratios on the net accounts differed depending on the size of the net transaction accounts at the depository office.

A number of net operating accounts, the so-called «reserve provision», were subject to a reserve ratio of zero per cent. Net operating account balances above the reserve provision and up to a certain amount, the so-called «low reserve ratio», were subject to a reserve ratio of 3%. Net operating account balances above the low reserve tranche were subject to a reserve ratio of 10 per cent. The reserve allocation and the low reserve deduction are indexed annually according to the formulas set out in the Federal Reserve Act (see table of low reserve payments and allocations since 1982).