The required reserves ratio is considered one of the most effective tools of the state monetary policy . This indicator is set by the central bank of the country for commercial credit organizations and is fixed by law. The purpose of the formation of reserves is to insure the entire banking system against unforeseen circumstances, to maintain the level of liquidity and profitability. In addition, they increase reliability and guarantee the safety of citizens' savings held in deposit accounts.
As a motivating factor, when the required reserves were created, the desire was always to have a certain amount of money, due to which the bank timely returns the money to the client. In the current economic situation, the government uses such reserves to regulate the money supply. For example, when there is too much cash in circulation, and in connection with this , inflation growth rates are accelerating, the required reserves ratio is specially raised. Thus, there is a rise in the cost of loans and containment of part of the funds in the settlement and cash center of the national bank.
Do not forget that with the help of such reserves, the government controls the natural processes in the financial market, adjusting the value of securities. However, this tool should be properly managed, because, in addition to its positive influence, a number of disadvantages can be distinguished. For example, the constantly changing reserve requirements create an imbalance in the entire banking system, as it is quite difficult for any credit institution to adapt to the new conditions. In addition, the amounts allocated to the reserve are taxed, which means that the commercial tank loses part of the money forever.
Bank reserves should contain sufficient funds to maintain the financial stability of the organization in a changing environment. If there are not enough of them, then commercial banks have to take loans from the national bank or sell part of their securities. But in the end, the level of general liquidity is noticeably reduced. This picture can be observed with increasing redundancy rates. When they are reduced, credit resources are released that go to pay off existing debt, which, accordingly, increases liquidity.
The required reserve ratio may affect the interest rate paid by legal entities or individuals as a fee for using a loan. Of course, when the government pursues a policy of "expensive money", the amount of contributions to the reserve increases - and then the free credit resources at the disposal of the bank becomes less. This is the reason for the increase in the interest rate on loans. However, the central bank is not always able to influence commercial credit organizations. A situation may arise in which banks conduct large-scale operations and have a large number of customers, which means that their profit margins will be quite high. A stable financial position allows transferring reserve requirements to an account with a national bank without changing the interest rates on loans and deposits.
Therefore, government agencies should carefully study market conditions, explore the banking sector, and only then take specific measures to influence the economy. Of course, any change in the required reserve ratio must be carefully thought out and justified. In a stable economy, the introduction of changes can adversely affect the entire banking system, then it makes sense to use other levers of monetary policy.