How to Calculate the Reserve Ratio

A bank's reserve ratio shows how much cash is immediately available.

Reserve ratio is a financial term used to describe the amount of money that a bank has. Specifically, it expresses how much of a bank's total deposits are kept on hand. Because the majority of a bank's deposits are not simply stored away in a vault, but rather are sent out again in the form of loans and investments, the value of deposits that a bank has on record is not always a good indicator of how much cash the bank has at its immediate disposal. So to accurately gauge how much money a bank currently has available, it is necessary to know the bank's reserve ratio.

Instructions

1. Determine the total value of deposits that the bank has on record. This number expresses the amount that the bank would have to pay out if all of the bank's clients wanted to withdraw all of their money immediately.

2. Determine how much cash the bank has on hand. This includes the money in the bank's safe, the bank's registers and any other physical location to which the bank personnel have immediate access.

3. Divide the amount the bank has on hand by the total value of deposits. For example, if you determine that the bank has $20 million in deposits and $2 million on hand, you would divide 2 by 20 to get 0.1.

4. Multiply the result of the previous step by 100. The product of the two numbers will be the reserve ratio percentage. Using the example, this would yield 0.1 x 100, or a reserve ratio of 10 percent.

References

• Investorwords: Reserve Ratio