What does reserve ratio mean?

The reserve ratio in finance refers to the percentage of a bank's deposits that must be held in reserve and not loaned out. It is set by central banks as a way to control the amount of money that banks can lend out and is a key tool in monetary policy. By increasing the reserve ratio, central banks can reduce the amount of money available to be loaned out, thereby reducing inflationary pressures in the economy. On the other hand, reducing the reserve ratio can increase the amount of money available for loans, stimulating economic growth. The reserve ratio is an important factor in determining a bank's liquidity and ability to withstand financial shocks. It is also used as a measure of a bank's stability and risk management practices. Banks must carefully manage their reserve ratios to ensure they can meet their obligations and maintain the trust of their depositors.