<p>Reserve requirements are already abolished in many developed countries including UK. Hence that paper is already outdated in post-reserve system that most countries have now. In UK or <a href="https://www.federalreserve.gov/monetarypolicy/reservereq.htm" rel="nofollow noreferrer">US</a> banks do not need to hold any reserves anymore.</p>
<p>Banks nowadays have to comply with various set of <a href="https://rpc.cfainstitute.org/en/policy/positions/capital-liquidity-requirements" rel="nofollow noreferrer">capital and liquidity</a> requirements which require them holding varying levels of assets, which you could view as sort of varying and bank specific asset requirement.</p>

CC BY-SA 4.0
2024-11-23T09:47:24.710Z
I was surprised to learn from your answer that the UK is a developing country rather than a developed one.
smcc
CC BY-SA 4.0
2024-11-23T12:40:29.990Z
@smcc it was typo I changed it to developed
1muflon1
CC BY-SA 4.0
2024-11-21T18:55:43.243Z
2024-11-23T12:40:13.950Z
2024-11-23T12:40:13.950Z
1muflon1
<p>According to the <a href="https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy" rel="nofollow noreferrer">this</a> article written by Bank of England, it says that once a bank lends credit to an individual, the balance sheet of this bank changes as its asset increase by the reserves and its liabilities increase with new deposits, which are equal to each other.</p>
<p>We know that in order prevent liquidity problems in cases of withdrawals, a bank has to have a certain amount of reserves. So there is a term 'Reserve Requirement', which restricts banks from lending where the ratio of reserves and deposits goes under of a certain level.</p>
<p>However, as it was indicated in the article that a money creation results with the same level of increase in new reserves and new deposits of a bank, the reserves to deposit ratio will increase even though the reserves stay same, as the bank increases its lending. For instance a bank has 10 units of reserves and 90 units of currency while it has 100 units of deposits. Then this bank decides to lend by 5 units, which increases new reserves and new deposits by 5 units. Before the lending, the ratio was <span class="math-container">$\frac{10}{100}=0.1$</span>, but with the lending it increased to <span class="math-container">$\frac{15}{105}=0.14$</span>. So as the bank increased its lending, it increased its stance on the liquidity issue, which I guess a contradiction. This is a bit hard to understand.</p>
<p>So I am indicating that why don't regulators define reserve requirements as the reserve level in terms of assets a bank holds rather than restricting reserves with respect to deposits. Thanks for your response.</p>

<banking><money>
Reserve Requirements
Tunay Sabri Yüksel
# Reserve Requirements

(Asked by: username_0 on 2024-11-21)

According to the [this](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy) article written by Bank of England, it says that once a bank lends credit to an individual, the balance sheet of this bank changes as its asset increase by the reserves and its liabilities increase with new deposits, which are equal to each other.

We know that in order prevent liquidity problems in cases of withdrawals, a bank has to have a certain amount of reserves. So there is a term 'Reserve Requirement', which restricts banks from lending where the ratio of reserves and deposits goes under of a certain level.

However, as it was indicated in the article that a money creation results with the same level of increase in new reserves and new deposits of a bank, the reserves to deposit ratio will increase even though the reserves stay same, as the bank increases its lending. For instance a bank has 10 units of reserves and 90 units of currency while it has 100 units of deposits. Then this bank decides to lend by 5 units, which increases new reserves and new deposits by 5 units. Before the lending, the ratio was $\frac{10}{100}=0.1$, but with the lending it increased to $\frac{15}{105}=0.14$. So as the bank increased its lending, it increased its stance on the liquidity issue, which I guess a contradiction. This is a bit hard to understand.

So I am indicating that why don't regulators define reserve requirements as the reserve level in terms of assets a bank holds rather than restricting reserves with respect to deposits. Thanks for your response.

**Tags:** banking, money


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## 1 answers

### Answer by username_1 on 2024-11-21. Score: 0

Reserve requirements are already abolished in many developed countries including UK. Hence that paper is already outdated in post-reserve system that most countries have now. In UK or [US](https://www.federalreserve.gov/monetarypolicy/reservereq.htm) banks do not need to hold any reserves anymore.

Banks nowadays have to comply with various set of [capital and liquidity](https://rpc.cfainstitute.org/en/policy/positions/capital-liquidity-requirements) requirements which require them holding varying levels of assets, which you could view as sort of varying and bank specific asset requirement.

> **Comments:**
> **username_2**: I was surprised to learn from your answer that the UK is a developing country rather than a developed one.  
> **username_1**: @username_2 it was typo I changed it to developed  

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