The cash reserve ratio (CRR) is a measure of how much money banks must hold in reserve against their deposits. It is a key measure of liquidity and is used to ensure that banks have enough money on hand to meet their depositors’ needs.

Formula:

Cash Reserve Ratio (CRR) = Cash on Hand/Total Deposits

Explanation:

• Cash on Hand: This is the amount of cash that banks have on hand in their vaults.
• Total Deposits: This is the total amount of deposits that banks have received from their customers.

The cash reserve ratio is expressed as a percentage and is regulated by central banks. The required cash reserve ratio is the minimum amount of cash that banks are required to hold in reserve. The actual cash reserve ratio is the amount of cash that banks choose to hold in reserve above and beyond the required minimum.

Purpose:

• To ensure that banks have enough money on hand to meet their depositors’ needs.
• To prevent bank runs.
• To maintain economic stability.

Impact:

• The cash reserve ratio has a significant impact on the banking system.
• If the cash reserve ratio is too high, banks will have less money available to lend out, which can lead to higher interest rates.
• If the cash reserve ratio is too low, banks may not be able to meet their depositors’ needs, which can lead to bank runs.

Additional Information:

• The cash reserve ratio is also known as the “reserve requirement.”
• The required cash reserve ratio is typically set by the central bank.
• The actual cash reserve ratio is typically higher than the required cash reserve ratio.
• Banks can use other assets to meet their required cash reserve ratio.