How to Calculate Reserve Requirements

How to Calculate Reserve Requirements2 How to Calculate Reserve Requirements The reserve requirement or cash reserve ratio (CRR) is regulated by the central bank. The term refers to the minimum reserve that each commercial bank or depository institution is required to hold with the central bank. A commercial bank normally calculates the amount of reserve requirement based on the total amount of customer deposits and notes. Normally, a commercial bank deposits the required amount of reserve requirements with the central bank or stores the cash in a special bank vault. The limits of reserve requirements are specified by the law and changes on a periodic basis. The changes in reserve requirements is governed and regulated exclusively by the Board of Governors. When you are calculating the reserve requirements of a commercial bank or depository institution, you need to refer to the Federal Reserve Board’s Regulation D to know the specific rates applicable to estimate the reservable liabilities of the institution.

Instructions

The reserve requirement or liquidity ratio of an institution differs based on its size and total amount of transactions in terms of dollars. In the USA, the liquidity ratio is set by the Board of Governors of the Federal Reserve System. So when you are calculating the dollar amount of a bank or depository institute’s CRR, you have to start with calculating the reservable liabilities of the institute. An institution’s reservable liabilities normally include the net transaction accounts, non-personal time deposits, and Eurocurrency liabilities. It should be noted here is that with effect from December 27, 1990 the non-personal time deposits and Eurocurrency liabilities have a zero reserve ration.
You can calculate the reserve requirements or liquidity ration on the net transaction account based on the total amount of net transaction accounts hold by the bank or depository institution. The net transaction accounts of a depository institution mostly include demand deposit accounts, share draft accounts, automatic transfer service accounts, NOW accounts, and transfer accounts. These accounts further consist of the ineligible banker acceptances and obligations due within a period of one week from the date of calculation. Based on the nature and category of the accounts maintained by a bank, you can calculate the total amount of its net transaction accounts. Most of the banks calculate and record the total amount of its net transaction accounts internally on a weekly basis. It is also very much important to remember that the amount of the net transaction accounts of an institutions changes on a regular basis.
Once you calculate the total amount of net transaction accounts on a particular date, you can implement the current liabilities slab to know the amount to be hold in a vault or deposited with the central bank as reserve requirements. If the total amount of net transaction accounts is less than or equal to $0 to $10.7 million, the bank is not required to hold any reserve requirement. At the same time, the bank will be required to hold reserve requirements of 3% if the total amount of net transaction accounts is more than $10.7 million but less than or equal to $58.8 million. If the calculated amount of more than $58.8 million, the depository institution has to hold the CRR at 10%.