Student Question

Who determines what a bank's reserve ratio is?


Expert Answers

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There are two ways to answer this.

The required reserve ratio for a bank is determined by the central bank of the country in which the bank does business.  In the US, the Fed determines the required reserve ratio.

However, banks might decide on their own that they need to hold more reserves than are required.  If a bank believes it needs to hold more reserves, it can do so.  This decision is made by the bank's executives.  The executives will decide this based upon what their bank needs.  They will look at the degree of risk in their overall portfolio and they will try to determine what needs the bank will have in the future.

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