If the total reserves of a commercial banking system is $80 billion and required reserve ratio on deposits is 10% what is the maximum level of deposit liabilities they canlegally hold?
When clients deposit funds in their account in a bank the bank is not required to maintain the complete deposit in the form of cash with itself. The cash reserve ratio is a fraction of the funds that have to be maintained with the bank; the rest can be lent out to clients that would like to borrow funds from the bank. This increases the money supply in the system and also provides bank with a means of making profits. If the cash reserve ratio is C%, and the bank receives an amount X in deposits it is allowed to lend an amount equal to (X*100)/C
If the total reserves of a bank are $80 billion and the reserve ratio is 10%, it can legally hold deposit liabilities up to $800 billion.