What is deposit reserve ratio?

Financial institutions must pay a portion of their deposits to the Central Bank, which is called the deposit reserve. The proportion of the deposit reserve to the total deposits of financial institutions is called the deposit reserve ratio. For example, if the deposit reserve ratio is 7%, it means that every time a financial institution absorbs a deposit of 1 million Yuan, it will deposit a deposit reserve of 70 thousand yuan to the central bank, with a loan fund of 0.93 million yuan. If the deposit reserve ratio is raised to 7.5%, the loanable funds of financial institutions will be reduced to 0.925 million yuan.

Under the deposit reserve system, financial institutions cannot use all deposits they have absorbed to issue loans. They must reserve a certain amount of funds, that is, the deposit reserve, for customers' withdrawal needs, therefore, the deposit reserve system is conducive to ensuring the normal payment by financial institutions to customers. With the development of the financial system, deposit reserve has gradually evolved into an important monetary policy tool. When the Central Bank reduces the deposit reserve ratio, the funds that financial institutions can use for loans increase, and the total amount of loans and money supply in society also increase. Otherwise, the total amount of loans and money supply in society will decrease accordingly.

The central bank's decision to increase the deposit reserve ratio is a macro-control over the monetary policy to prevent the rapid growth of monetary credit. Since the beginning of this year, China's economy has been growing rapidly, but the prominent contradictions in its economic operation have been further highlighted, and the rapid growth of investment has not diminished. One of the main reasons for the rapid growth of investment is the rapid growth of monetary credit. Increasing the deposit reserve ratio can correspondingly slow down the growth of Currency and Credit, and maintain a sustained and rapid coordinated and healthy development of the national economy.