Glamor Economics

Chapter 106

Chapter 14 Section 7 An Effective Means of Limiting Excess Liquidity - Deposit Reserve Ratio

In 2006, the central bank used a variety of monetary policy tools to vigorously recover the liquidity of the banking system and achieved certain results.Among them, the deposit reserve ratio has been continuously raised, which has largely recovered excess liquidity and greatly consolidated the effectiveness of macro-control. In 2006, the central bank raised the deposit reserve ratio three times:
On July 7, the RMB deposit reserve ratio of deposit-taking financial institutions was raised by 5 percentage points.

On August 8, the reserve requirement ratio for deposit-taking financial institutions was raised by 15 percentage points.

On August 11, the reserve requirement ratio for deposit-taking financial institutions was raised by 15 percentage points.

Since then, as investment continued to overheat in 2007, excess liquidity continued, and economic changes aggravated inflation, the central bank stepped up efforts to raise deposit reserves. In 2007, the central bank raised the reserve ratio 10 times.In 2008, the central bank raised the deposit reserve ratio four times. At the end of 4, the RMB deposit reserve ratio of deposit-taking financial institutions reached a record high of 2008%.

Why is deposit reserve so powerful?
The exact meaning of deposit reserve refers to the deposits in the central bank prepared by financial institutions to ensure customers' deposit withdrawal and fund settlement needs. The ratio of the deposit reserve required by the central bank to its total deposits is the deposit reserve ratio.The reserve fund was originally intended to guarantee payment, but it brought an unexpected "by-product", which is to give commercial banks the function of creating money, which can affect the credit expansion ability of financial institutions, thereby indirectly regulating the money supply.Now, the deposit reserve ratio has become an important tool of the central bank's monetary policy, and it is one of the three traditional monetary policy tools.

Its main functions are as follows:
1.Guarantee the liquidity of deposit money institutions such as commercial banks.When some banks have a liquidity crisis, the central bank has the ability to rescue these banks and help them restore liquidity by providing short-term credit.

2.Centralize the use of part of the credit funds.This is the responsibility of the central bank as the bank of the bank, this "lender of last resort", which can also provide rediscounting to financial institutions.

3.Regulates the total money supply.For example, if a bank absorbs a deposit of 1000 yuan and the deposit reserve ratio is 10%, then the maximum amount that the bank can use for investment during the same period is 900 yuan, and the 100 yuan reserve must be deposited in an account designated by the central bank.

4.To prevent the risk of a run, in the event of a run and the risk of the bank, this part of the reserve can be used to protect the rights and interests of depositors.

我国的存款准备金制度是在1984年建立起来的，至今存款准备金率经历了26次调整。最低的一次是1999年11月，存款准备金率由8%下调到6%；最高一次为2008年6月，存款准备金率由16.5%上调至17.5%。

Raising the deposit reserve ratio is an important measure taken by the central bank to reduce the excessive liquidity of commercial banks. It will reduce the supply of credit funds, which is a signal of tightening and has a direct relationship with investment.When the central bank raises the required reserve ratio, the ability of commercial banks to provide loans and create credit decreases.Because the reserve ratio increases, the money multiplier becomes smaller, thereby reducing the ability of the entire commercial banking system to create credit and expand the scale of credit. Expenditures are reduced accordingly.vice versa.

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Deposit reserve refers to the funds prepared by financial institutions to guarantee customers' deposit withdrawal and fund settlement needs. The ratio of the deposit reserve paid by financial institutions to the central bank in accordance with regulations to its total deposits is the deposit reserve ratio.The deposit reserve system was established under the central bank system. The United States was the first to require commercial banks to deposit deposit reserves with the central bank in legal form.The initial function of the deposit reserve system was to guarantee the payment and liquidation of deposits, and then gradually evolved into a monetary policy tool.By adjusting the deposit reserve ratio, the central bank affects the credit capital supply capacity of financial institutions, thereby indirectly regulating the money supply.

(End of this chapter)