Money Reserve

Reserve refers to the financial institutions to ensure that customers withdraw their deposits and financial settlement needs to prepare in the central bank deposits, the central bank deposit reserve requirement ratio to the total of their deposits is the deposit reserve ratio. Reserve is to restrict credit expansion of financial institutions and guarantee the customer deposit withdrawals and fund settlement needs to prepare funding. The statutory deposit reserve ratio, is the financial institutions required to pay the central bank deposit reserve ratio of the total amount of their deposits. This part is a risk reserve, can not be used to pay loans. The higher this ratio, the greater the intensity of implementing austerity policies. In the world, the United States the earliest form of law will require commercial banks to the central bank deposit reserve requirements. Deposit reserve system, the initial role is to ensure the payment and settlement deposits, and then gradually evolved into a monetary policy tool, the central bank deposit reserve ratio by adjusting the affected financial institutions, credit financing, thereby indirectly control the money supply.

The central bank by adjusting the reserve ratio, can affect the capacity of financial institutions, credit expansion and thus indirectly control the money supply. The statutory reserve is a traditional monetary policy tools. Raising the deposit reserve rate to commercial banks to freeze funds to curb the excessive growth of bank credit funds. When the central bank to increase the statutory reserve ratio, the commercial banks can provide loans and the ability to create a credit for the decline. Because the reserve ratio, money multiplier would become smaller, thereby reducing the overall commercial banking system to create credit, to expand the capacity of the credit scale, the result is the community and the money supply is tight, the money supply to reduce interest rate, investment and social expenses are to be reduced. In the deposit reserve system, financial institutions, deposits can not be absorbed totally used to pay loans, must retain certain amount of money that the deposit reserve to prepare for customer withdrawals of need, and therefore the deposit reserve system will ensure that financial institutions customer's normal payment. As the financial system, the development of the reserve and gradually evolved into an important monetary policy tool. When the central banks to cut deposit reserve rate, financial institutions, to increase the funds available for lending, social lending volume and a corresponding increase in money supply; the other hand, the community total lending and money supply will be reduced accordingly.