Required Reserves:

100% of Demand Deposits

25% of Time Deposits

This example depicts significantly more restrictive reserve requirements of 100% on demand deposits and 25% on time deposits.

Reserve Requirements & Credit Potential For Your Bank

Total Deposits (Actual Deposits = Demand + Time)

Your Bank still has $7,487,070 in total deposits. ($6,029,656 demand deposits and $1,457,414 time deposits.)

 

Demand Reserve Ratio: 100.00%
Time Reserve Ratio: 25.00%

 

Actual Reserves

Your Bank still has Actual Reserves of $7,287,070.

Required Reserves

Based on reserve requirements of 100% for demand and 25% for time Your Bank is required to keep $6,394,010 in reserves.

Excess Reserves

With Actual Reserves of $7,287,070 less Required Reserves of $6,394,010  Your Bank, in this example, has only $893,061 in Excess Reserves.

Effective Reserve Ratio

By dividing the Required Reserves of $6,394,010 by the Actual Reserves of $7,287,070 we see that Your Bank has an Effective Reserve Ratio of 85.40%. (I will use the Effective Reserve Ratio to calculate an approximation of Your Bank's credit potential.)

Deposit Maximum

By dividing Actual Reserves of $7,287,070 by the Effective Reserve Ratio of 85.40% I can estimate that Your Bank can have maximum total deposits of $8,532,800.

Credit Potential

If Your Bank currently has $7,487,070 in total deposits and it could have maximum total deposits of $8,532,800, it could have another $1,045,730 in deposits within the limits of its reserve requirements.

 

You can see that raising the effective reserve ratio greatly reduces the bank's credit expansion potential.

This sort of reserve requirement would lead to much sounder banking. The 100% requirement on demand deposits would fulfill the bank's contractual obligation to have all demand funds available at all times. If short-term time deposits were not treated as demand accounts (available at all times), depositors would not have access to those funds while they were on loan to other bank customers. These two conditions (100% reserves on demand deposits and time deposits with restricted withdrawals) would create an essentially fixed money supply. This assumes no artificial expansion of reserves, which I will deal with later. (Remember that market prices convey more accurate information with a fixed money supply.)