According to Hogan & Maiberger (2017), the Federal specifies checkable deposits percentage that banks are required to hold as reserves. The checkable deposits percentage is the required reserve ratio (Hogan & Maiberger, 2017). In this case, the necessarily reserved ratio is 10%. Hence, the bank is required to set aside ten percent (10%) of the checkable deposits to represent reserve deposits with Federal.
Notably, the reports indicate that Bank A has a $100 million checkable deposit increase.
Therefore, money that can be created by Bank A =:
$100,000,000*10 % = $1,000,000,000.
Additional reserves can be used to support the creation of the loan. Nonetheless, the checkable deposit increases by $1 billion.
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All in all the banking system, as a whole, can create $ 1 billion.
The required reserve ratio relates to money creation directly. Hogan & Maiberger (2017) state that the amount of money created depends on the reserve requirement ratio. Evidently, the reserve ration determines the amount of money available to loans. In this case, the deposit multiplier represents the ratio of the checkable deposit amounts compared to the reserve amount. All in all, the deposit multiplier is inversely related to the reserve requirement ration.
Some banks hold a part in excess reserves instead of loaning all excess reserves out because the Fed Reserve currently pays all interests on reserves (Hogan & Maiberger, 2017). Besides, the cost of holding them has become low; hence, the Fed Reserve quickly pays interest on them. As a result, there has been a dramatic growth of the number of funds held by banks since the last financial crisis.
Other ways through which banks may use the portion of their excessive reserves are for loans to businesses and customers (Hogan & Maiberger, 2017).
References
Hogan, D. G., & Maiberger, J. (2017). Federal reserve system and monetary policy. The American Middle Class: An Economic Encyclopedia of Progress and Poverty [2 volumes] , 141.
