Reserve ratio (reserve requirement or cash reserve ratio) is a ratio that is used by central bank of an area to regulate the financial market. This financial ratio compares the cash of the bank to the deposits that are held in that particular bank. Cash of the bank is recognized as physical cash held by bank and deposits (assets) of the commercial bank that are held in the central bank while these are the most liquid assets of the commercial bank.
Central bank sets the minimum ‘reserve ratio’ and all the commercial banks in that country have to follow this minimum requirement. Higher reserve ratio means higher liquidity (short-term stability) of the bank but also may lead to lower profitability because such cash assets usually are least profitable for the bank.
The central bank may change reserve requirement because of few reasons:
However, reserve ratio is more often manipulated in emerging market than in developed ones where financial market is at more sensitive balance.
Investment psychology gains momentum in contemporary business world
Most Popular Articles
Investing in Gold (I)
Investing in Gold (II)
Investing in Uncertain Period
ARE YOU INTERESTED IN:
BROWSE ON DICTIONARY: