Reserve Ratio Determination

Now that we have seen the impact the reserve ratio has on the money supply we understand the importance of setting the right reserve ratio. So how is the reserve ratio calculated? The reserve ratio is set by the Board of Directors of the Federal Reserve (Central Bank of the United States of America). They have the sole authority to determine and change the reserve ratio and reserve requirements. In the United States of America the reserve ratio is as follows:
For depository institutions with less than $15.2 million in deposits, the reserve ratio is zero that is they need not hold any reserves and can lend their entire account liabilities.
For banks where the net transactions are more than $15.2 million but less than $110.2 million, the reserve ratio is 3%.
For banks with net transactions higher than $110.2 million, the reserve ratio is 10%.
The dollar amount of the reserve requirement is calculated as the reserve ratio for the bank (according to the above description) times the institution’s reservable liabilities.