<p>In a fractional reserve banking system, the maximum portion of the money supply represented by bank-issued loans relates to the reserve requirement as <span class="math-container">$M_{loans} = \frac{deposits}{r} - deposits$</span> where <span class="math-container">$r$</span> is the reserve requirement expressed as a decimal.</p>

<p>For example, a bank holding \$1000 in deposit liabilities facing a reserve requirement of 1% is free to issue <span class="math-container">$\$1000/.01 - \$1000 = \$99,000$</span> in new money in the form of loans.  Doubling the reserve requirement to 2% would reduce this number to <span class="math-container">$\$49,000$</span>.</p>

<p>Reserve requirements in the US depend on the total amount held by a given bank and range from 0% to 10%, with larger banks facing the larger requirement.  <a href="https://www.federalreserve.gov/monetarypolicy/reservereq.htm" rel="nofollow noreferrer">https://www.federalreserve.gov/monetarypolicy/reservereq.htm</a>.  Some countries, like Canada, do not have a reserve requirement.  Banks determine their reserves according to their internal risk models, including assumptions on inflation risk.</p>

<p>Of course, banks don't <em>have</em> to lend money out until they hit the reserve requirement, and as noted in comments above, the money supply in the US is largely decoupled from banking operations thanks to quantitative easing measures.</p>

CC BY-SA 4.0
2020-02-05T19:01:35.493Z
So the monetary base will increase right? Which component of it is increasing?
Alex Wang
CC BY-SA 4.0
2020-02-05T19:52:56.133Z
In your original question you wrote "currency+currency held by banks+deposits of banks at central bank". The part that would increase due to creation of loans is "currency", e.g., currency in circulation.
heh
CC BY-SA 4.0
2020-02-05T18:11:35.117Z
2020-02-05T18:11:35.117Z
heh
<p>Monetary base is defined as currency+currency held by banks+deposits of banks at central bank. We assume that the current reserve is below the minimum reserve requirement. Which component of monetary base is affected?
Please note the distinction between money supply and monetary base.</p>

CC BY-SA 4.0
2020-02-05T00:24:06.600Z
Since the financial crisis, [in the US the monetary base has exploded](https://fred.stlouisfed.org/series/BOGMBASE), mainly because commercial banks hold much more as reserves in the FED that they are required to, so minimum reserve requirements have no impact
Henry
CC BY-SA 4.0
2020-02-05T00:28:27.277Z
Much the same elsewhere, for example in [Switzerland](https://fred.stlouisfed.org/series/SNBMONTBASE) and the [UK](https://fred.stlouisfed.org/series/MBM0UKM)
Henry
CC BY-SA 4.0
2020-02-05T14:30:45.560Z
What if the reserve is below the minimum reserve requirement (a counterfactual question)?
Alex Wang
<macroeconomics><banking><central-banking>
How does an increase in the minimum reserve requirement affect the monetary base?
Alex Wang
# How does an increase in the minimum reserve requirement affect the monetary base?

(Asked by: username_0 on 2020-02-04)

Monetary base is defined as currency+currency held by banks+deposits of banks at central bank. We assume that the current reserve is below the minimum reserve requirement. Which component of monetary base is affected?
Please note the distinction between money supply and monetary base.

**Tags:** macroeconomics, banking, central-banking

> **Comments:**
> **username_1**: Since the financial crisis, [in the US the monetary base has exploded](https://fred.stlouisfed.org/series/BOGMBASE), mainly because commercial banks hold much more as reserves in the FED that they are required to, so minimum reserve requirements have no impact  
> **username_1**: Much the same elsewhere, for example in [Switzerland](https://fred.stlouisfed.org/series/SNBMONTBASE) and the [UK](https://fred.stlouisfed.org/series/MBM0UKM)  
> **username_0**: What if the reserve is below the minimum reserve requirement (a counterfactual question)?  

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## 1 answers

### Answer by username_2 on 2020-02-05. Score: 1

In a fractional reserve banking system, the maximum portion of the money supply represented by bank-issued loans relates to the reserve requirement as $M\_{loans} = \frac{deposits}{r} - deposits$ where $r$ is the reserve requirement expressed as a decimal.

For example, a bank holding \$1000 in deposit liabilities facing a reserve requirement of 1% is free to issue $\$1000/.01 - \$1000 = \$99,000$ in new money in the form of loans. Doubling the reserve requirement to 2% would reduce this number to $\$49,000$.

Reserve requirements in the US depend on the total amount held by a given bank and range from 0% to 10%, with larger banks facing the larger requirement. <https://www.federalreserve.gov/monetarypolicy/reservereq.htm>. Some countries, like Canada, do not have a reserve requirement. Banks determine their reserves according to their internal risk models, including assumptions on inflation risk.

Of course, banks don't *have* to lend money out until they hit the reserve requirement, and as noted in comments above, the money supply in the US is largely decoupled from banking operations thanks to quantitative easing measures.

> **Comments:**
> **username_0**: So the monetary base will increase right? Which component of it is increasing?  
> **username_2**: In your original question you wrote "currency+currency held by banks+deposits of banks at central bank". The part that would increase due to creation of loans is "currency", e.g., currency in circulation.  

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