How to Find Required Reserve Ratio: Formula & Fed’s 0% Rule

If you want to know how to find required reserve ratio (RRR), the simplest way is to use the formula: Required Reserves / Total Deposits. The RRR is a monetary policy tool set by a central bank (like the U.S. Federal Reserve). It defines the percentage of deposits a bank must hold in reserve and cannot lend out.

Piprider will explain the formula, provide a clear calculation example, and show how central banks use the RRR to impact the economy.

1. What Is the Required Reserve Ratio?

The Required Reserve Ratio (RRR or cash reserve ratio) is the percentage of a bank’s total transaction accounts and other deposits that it must hold in reserve, meaning it cannot be loaned out. It is a key monetary policy tool set by a country’s central bank (like the U.S. Federal Reserve).

The RRR has two main goals. First, it helps ensure a bank has enough liquidity to meet customer withdrawals and prevent a run on a bank. Second, the central bank uses it to control the money supply in the economy.

For example, if the RRR is 10%, a bank must hold $10 in reserve for every $100 of customer deposits. The bank can only lend out the remaining $90.

2. Why Does the Required Reserve Ratio Matter?

The reserve requirement matters because it is a powerful monetary policy tool that central banks use to directly influence a country’s money supply and credit availability.

Its most direct impact is on bank lending:

• Increasing the RRR: When the central bank raises the ratio, banks must hold more money in reserve. This reduces their ability to lend and tightens their lending practices, which slows down the money supply and can help control inflation.
• Decreasing the RRR: When the central bank lowers the ratio, banks have more excess reserves. This increases their ability to lend, which expands credit, boosts the money supply, and can help stimulate economic growth.

The RRR is one of the three classic tools of monetary policy, alongside Open Market Operations (OMO) and the Discount Rate. By changing this one number, a central bank can influence interest rates, inflation, and the overall pace of the economy.

3. How to Find the Required Reserve Ratio: The Formula

You can find the ratio using a simple formula that divides the reserves a bank must hold by the total deposits it has.

3.1. Basic Formula

The formula to find the Required Reserve Ratio (RRR) is:

• Required Reserves: The amount of money the bank is forced to hold.
• Total Deposits: The total amount of money customers have deposited at the bank.

3.2. Example Calculation

Let’s use an example to see how to find the required reserve ratio:

• A bank has $200 million in total customer deposits.
• The central bank requires it to hold $20 million in reserves.
• Formula: RRR = ($20,000,000 / $200,000,000) * 100%
• Result: The Required Reserve Ratio = 10%

3.3. Finding Required Reserves Given the Ratio

You can also use the formula to find the dollar amount of reserves if you already know the ratio.

Formula:

• Example: The RRR is 12% and a bank has $500 million in deposits.
• Calculation: 0.12 * $500,000,000 = $60 million
• Result: The bank must hold $60 million in required reserves.

4. How to Find the Required Reserve Ratio in Real Data

While the formula is simple, how to find required reserve ratio data in the real world involves two parts: finding the official reserve requirement set by the central bank and finding the data from a specific commercial bank’s reports.

4.1. Step 1: Check Central Bank Regulations

The Required Reserve Ratio is a public policy number, not a secret. You can find it by checking the official publications of a country’s central bank or bank regulatory authority.

• In the United States: The Federal Reserve sets the ratio. You can find this information in their official publications regarding Regulation D. (Note: As of March 2020, the Fed set the RRR to 0%).
• In Europe: The European Central Bank (ECB) sets the reserve requirement for banks in the Eurozone.
• In Vietnam: The State Bank of Vietnam (SBV) periodically announces the required reserve ratio for its commercial banks.

4.2. Step 2: Identify the Bank’s Required and Actual Reserves

To see how the ratio is applied, an analyst would look at a commercial bank’s financial statements. This data is typically found in the bank’s quarterly or annual report, specifically on the balance sheet.

You would look for line items such as “Cash and Balances with Central Banks” or “Cash and Due from Banks.” This figure represents the bank’s actual reserves. A bank’s report may also state its required reserves separately from its excess reserves (any amount held above the reserve requirement).

4.3. Step 3: Apply the Formula

An analyst or student would then apply the formula to this real data. This is not to “discover” the ratio (which is already set by the central bank) but to verify the bank’s compliance and to analyze its liquidity position.

Formula: RRR = (Required Reserves / Deposits) * 100%

If the bank is meeting its requirement, how much “excess reserve” (extra cash) it holds, and how much of its deposit base is “locked up” versus being used for lending.

5. What Is the Relationship Between the Reserve Ratio and the Money Multiplier?

The Required Reserve Ratio is a powerful tool because it directly determines the “Money Multiplier” (MM). The MM is a concept that shows the maximum amount of new money that can be created in the banking system from an initial deposit. This process of credit creation is the basis of fractional reserve banking.

The formula is:

Let’s look at the examples from your outline:

• If RRR = 10% (or 0.10):
  • Money Multiplier = 1 / 0.10 = 10
• If RRR = 20% (or 0.20):
  • Money Multiplier = 1 / 0.20 = 5

This calculation shows that when the RRR is decreased (from 20% down to 10%), the Money Multiplier increases (from 5 to 10). This allows the banking system to create much more money from the same initial deposit, which expands the total money supply.

6. How Do Central Banks Adjust the Reserve Ratio?

Central banks adjust the Required Reserve Ratio (RRR) as a direct and powerful way to either cool down or stimulate the economy based on current economic conditions. It is a “heavy” tool, often adjusted in tandem with the policy interest rate and Open Market Operations (OMO).

• To slow the economy (Contractionary): If inflation is too high, the central bank will increase the RRR. This forces banks to hold more cash, reduces their ability to lend, and tightens the money supply.
• To stimulate the economy (Expansionary): To fight a recession or add liquidity, the central bank will decrease the RRR. This frees up banks’ reserves, encouraging them to lend more money, which expands credit and boosts the money supply.

7. Example: The Federal Reserve and Reserve Requirements

Central banks use the reserve requirement very differently depending on their economic goals. The United States and China provide a clear contrast.

7.1. The U.S. Federal Reserve (Fed)

Before 2020, the U.S. Federal Reserve used a tiered system, where the RRR could be anywhere from 0% to 10% depending on the size of the bank’s transaction accounts.

However, in March 2020, in response to the COVID-19 pandemic, the Fed took the dramatic step of reducing the Required Reserve Ratio to 0% for all U.S. banks (Federal Reserve Board, 2020).  According to the Federal Reserve, this was done to ensure banks had maximum liquidity to support the economy.

7.2. The People’s Bank of China (PBoC)

In contrast, the People’s Bank of China (PBoC) still actively uses the RRR as a primary monetary policy tool. The PBoC frequently adjusts the ratio for its banks (currently around 7-10%) to either stimulate the economy by releasing funds or to tighten credit by locking more money up (People’s Bank of China [PBoC], 2025).

8. What Are Common Mistakes and Misunderstandings?

While the concept seems simple, several common misunderstandings can confuse students and analysts. The most frequent errors involve confusing the RRR with capital requirements, assuming the ratio is a fixed, universal number, and not understanding its indirect effects.

• Confusing RRR with capital requirements: These are not the same. The RRR is the percent of deposits from depositors a bank must hold. Capital requirements (like those in Basel III) are the amount of its own money (equity) a bank must have to absorb potential losses.
• Assuming the RRR is fixed: The ratio is not a universal constant. It changes by country and over time based on local economic conditions. As noted, the U.S. ratio is currently 0%, while other countries’ ratios are much higher.
• Missing the interest rate connection: Many don’t realize that the RRR indirectly affects interbank interest rates. When the RRR is high, banks have less “excess” cash, so they must borrow more from each other, which can push interbank lending rates higher.

9. Frequently Asked Questions (FAQ)

10. Conclusion

The Required Reserve Ratio is a key tool in monetary policy that helps maintain economic stability.

Knowing how to find required reserve ratio and understanding its impact gives us a deeper insight into fractional reserve banking and the mechanisms of monetary control. Even though the RRR for transaction accounts is no longer a primary tool in some countries, the concept remains a fundamental part of every economics and finance education.

To learn more about how economic policy impacts the markets, explore the full library of guides at Piprider.com.