Cash ratio

The cash ratio is the percentage of money that a financial entity maintains in its liquid reserves in the Central Bank (BC) of its country. It is also known as bank reserve ratio, reserve ratio, reserve rate or bank reserve . 

When talking about economics and finance, the term cash ratio is used to define the legal cash ratio or the mandatory cash ratio. That is, the money that a financial entity must maintain without being able to use loans or invest. In other words, the percentage of money to be saved in the box (account in the BC).

The monetary authorities of each country establish a mandatory minimum destined to comply compulsorily, thus being able to have a higher percentage in cash, but in no case less. It is an instrument that is commonly used as a monetary policy.  The lower the cash ratio, the greater the amount of money in the market.

In larger and more real terms, the cash ratio (C) that a bank has is calculated as its reserves (R) among all the deposits granted (D).

The function of the cash ratio is that the money multiplier is not excessively high. The objective is to be able to guarantee the solvency in the short term of the banks and that the funds that deliver these do not multiply in an uncontrolled manner.

Example: If the cash ratio is 1%, it means that when you take € 1,000 to a new bank, it must save € 10 in its reserves. Normally, banks keep these reserves in the country’s Central Bank.

The cash ratio by country

This percentage varies by country or currency. Let’s look at the cash ratio of several countries in the world: