Cash ratio: minimum reserves of banks

Also referred to as the minimum reserve ratio in the last period. The bank must leave a percentage of our money in cash, can not dispose of it to circulate it in investments or lend it in the form of credits. Depending on the country, the amount will vary, is something that is fixed for all financial institutions. Some banks may decide to raise this legal minimum somewhat higher.

For countries that have the euro as their currency, the European Central Bank decides how the cash ratio will be applied. The European authorities decided to lower the mandatory percentage of minimum reserves of the national banks of each country from 2% to 1%. The decrease means that banks can lend more and entrepreneurs would benefit from it. It is understood that this decision has been taken to encourage credit and that the economy returns to the flight after the bad situation of the banks. In the opposite case, when it is uploaded, they are obliged to save more and the activity that is done with the rest is reduced. Very few changes are made in the cash ratio because the minimum change can break the stability that both the major banks of developed countries look at.

Maintaining this amount in reserve supposes a cost for finances and there may be cases of savings banks or banks, which have to go to other borrowers to follow a growth rhythm because they can not dispose of what they have in the warehouse freely. To compensate for this, they have a month during which the reserves can be more or less than the minimum required provided that at the end of the term, the average reaches the percentage required by law. In the event that the required date is not reached on the last day, the European Central Bank considers that the agreement has not been complied with and may impose sanctions.

The remaining money is put into circulation for the economy to work. With these virtual savings, banks invest in projects that benefit the same society that has deposited or uses it to obtain benefits thanks to the interest they charge to finance different things.

The cash ratio is an essential part of monetary policy to ensure that the needs of the people who have deposited the money in the banks are covered. They can also save other funds, which are surplus reserves. This is not usually the case because it can produce an excess of liquidity that is harmful if you want the money to circulate and invest in other items that can generate income. This kind of funds do depend entirely on financial institutions and are the ones that value what amount seems the most appropriate when analyzing the benefits of moving the money and the risks they incur in the event that large numbers are withdrawn.