The reserve ratio (also known as the cash reserve ratio) is the portion of customer deposits that banks are legally required to keep on hand rather than lending out.

This ratio is established by the central bank and serves as a tool to manage how much credit commercial banks can provide to the public:

• A lower reserve ratio allows banks to lend more money, which increases the supply of money in the economy.
• A higher reserve ratio forces banks to keep more money in reserve, which limits the amount of money available for loans and slows down the expansion of the money supply.