Reserve is the funds deposited by financial institutions in the central bank to ensure customers' withdrawal of deposits and settlement of funds. The ratio of the deposit reserve required by the central bank to its total deposit is the deposit reserve ratio.
When the reserve ratio is reduced, the reserves deposited in the central bank can be reduced. Then, the funds that can be lent will increase, and usually the deposit and loan interest rates will also decrease. This is a fiscal policy adopted when the economy is relatively loose. Under the condition of deflation, it will also stimulate loans and economic growth by lowering the deposit and loan interest rates.
Lowering the benchmark interest rate of deposits and loans means that the state should implement a loose monetary policy and increase the liquidity of money.
Extended data
Reserve refers to the cash on hand of commercial banks and the deposits in the central bank in proportion.
Cash on hand of commercial banks is deposited in the central bank in proportion. The purpose of implementing reserve is to ensure that commercial banks can have sufficient solvency when they suddenly withdraw a large amount of bank deposits. Since 1930s, the statutory reserve system has become an important means for the state to regulate and control the economy, and it is a system for the central bank to control the credit scale of commercial banks. The reserve and reserve ratio of commercial banks controlled by the central bank affect the credit scale of banks.
According to this system, commercial banks can't lend all the deposits they absorb, but must deposit them in the central bank according to a certain proportion or in the form of deposits. The ratio of reserves to total deposits is called reserve ratio.
By adjusting the deposit reserve ratio, the central bank can influence the credit expansion ability of financial institutions, thus indirectly regulating the money supply. The ratio of deposit reserve to total deposits of financial institutions is called deposit reserve ratio. For example, the deposit reserve ratio is 10%, which means that every time a financial institution absorbs 100000 yuan in deposits, it must deposit100000 yuan in deposit reserve with the central bank, and the funds used to issue loans are 9 million yuan.