Suppose that you deposit $4,500 in your bank and the required reserve ratio is 18 percent. The maximum loan your bank can make as a direct result of your deposit is 3690.
What exactly is a bank loan and the required reserve ratio?
- A loan is a quantity of money that one or more people or businesses obtain from banks or other financial organizations in order to handle their finances in connection with anticipated or unforeseen circumstances.
- By doing this, the borrower creates a debt that must be repaid with interest within a predetermined time frame.
- The percentage of deposits that authorities mandate a bank maintain in reserves and refrain from lending out is known as the required reserve ratio.
- If the required reserve ratio is 1 to 10, a bank can only lend out $0.90 of every dollar it has on deposit, but it must retain $0.10 in reserves.
Hence, The maximum loan your bank can make as a direct result of your deposit is 3690.
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