How to Calculate the Reserve Ratio

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How to Calculate the Reserve Ratio
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The Federal Reserve requires banks to set aside a percentage of deposits to cover losses. The dollar amount that a bank must reserve is determined by applying the reserve ratios specified in the Federal Reserve Board's Regulation D to the bank’s reservable liabilities. The percentage of liabilities that must be reserved is based on the bank’s net transaction accounts.

Determine Computation Period

Banks report the balance of their transaction accounts, deposits and vault cash to the Federal Reserve via its form FR 2900. The frequency with which a bank files the FR 2900 report determines how often the bank must compute its reserves; FR 2900 reports are filed weekly or quarterly. Reserve computation periods correspond with a bank’s FR 2900 reporting frequency.

Calculate Gross Transaction Accounts and Compute Deductions

Total transaction accounts consists of demand deposits, automatic transfer service (ATS) accounts, Negotiable Order of Withdrawal (NOW) accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible bankers acceptances and obligations issued by affiliates maturing in seven days or less. To compute total deductions,

  1. Add up the end-of-day balances for all of the accounts covered in the FR 2900 report for the days in the appropriate reporting periods. 
  2. Then calculate the average balances by dividing the sum by the number of days in the computation period. 
  3. Add the averages for all relevant accounts to determine the gross transaction accounts.
  4. Add the demand balances due from depository institutions and cash items in process of collection to get the sum of total deductions.

Calculate Net Transaction Accounts

Subtract the total deductions from gross transaction accounts to get net transaction accounts. If the result is a negative value, then the bank’s net transaction accounts are zero; it has a reserve requirement of zero, and it has a reserve balance requirement of zero. If the result is not negative, then the bank must continue to calculate its reserve ratio by adjusting its net transaction accounts.

Identify Adjustment Amounts

Identify the current exemption amount and low reserve tranche amounts that will be used to adjust net accounts by checking the Federal Reserve Board of Governors website. The exemption amount is the amount of net transaction accounts subject to a reserve requirement ratio of zero percent. It is adjusted each year by statute.

The low reserve tranche amount is the amount of a bank’s net transaction accounts that is subject to a reserve ratio of 3 percent. It also is adjusted annually.

To calculate the adjusted low reserve tranche, subtract the exemption amount from the low reserve tranche.

Calculate Adjusted Net Transaction Accounts

Subtract the exemption amount from the net transaction amount accounts to get the adjusted net transaction accounts. If the result is negative, then the bank has a reserve requirement of zero and a reserve balance requirement of zero. If the result is not negative, calculate the reserve requirement.

Compute Reserve Requirement

If the adjusted net transaction accounts is less than or equal to the adjusted low reserve tranche, then the reserve ratio is 3 percent. If the adjusted net transaction accounts exceeds the adjusted low reserve tranche, then the reserve ratio is 3 percent for net transaction accounts, up to the low reserve tranche. Additional liabilities are subject to a reserve ratio of 10 percent. The bank’s reserve requirement equals the sum of the amount reserved at 3 percent and the amount reserved at 10 percent.

References

About the Author

Jim Molis has more than 20 years of experience writing for and about businesses. He has been a business reporter for the Columbus (Ga.) Ledger-Enquirer, a managing editor of the Atlanta Business Chronicle and an editor of the Jacksonville Business Journal. He also has written for management consultants, professional services firms and numerous publications as a freelancer.