How does the statutory reserve requirement policy work?

Monetary policy tools.

Monetary policy tools, also known as monetary policy instruments, refer to the policy instruments adopted by ** banks to achieve monetary policy objectives. Monetary policy tools can be divided into general policy tools (including statutory reserve ratio, rediscount policy, open market operations) and selective policy tools (including direct credit control, indirect credit guidance, etc.).

General policy instruments refer to the three major policy tools that banks often use.

1) Statutory reserve ratio.

When the bank raises the statutory reserve ratio, the funds available to commercial banks will decrease, the lending capacity will decrease, the money multiplier will become smaller, and the amount of money in circulation in the market will decrease accordingly. Therefore, in the event of inflation, the bank can increase the statutory reserve ratio; Conversely, the statutory reserve requirement ratio will be lowered. Because the effect of the statutory reserve ratio is very obvious through the effect of the money multiplier, it is often believed that the effect of this policy tool is too drastic, and its adjustment will affect the entire economic and social psychological expectations to a large extent, therefore, the bank is cautious about the adjustment of the statutory reserve ratio.

The deposit reserve system refers to the system in which the first bank requires commercial banks and other financial institutions to withdraw a certain amount of money from the total deposits they absorb at the prescribed rate and deposit it in the first bank in accordance with the power granted by the law, and indirectly controls the amount of social money. Correspondingly, the reserve requirement is the deposit deposited by commercial banks and other financial institutions with the ** bank according to a certain proportion of their deposits. As long as a financial institution operates a deposit business, it must deposit deposit reserves.

Before the collapse of the eyes, the deposit reserve system plays an important role in protecting the interests of the majority of depositors, and is widely used as a monetary policy tool by the best banks in various countries. In China, all financial institutions that absorb general deposits, including commercial banks, credit cooperatives, trust and investment institutions, finance companies, and foreign-funded financial institutions, have the obligation to deposit reserve funds in accordance with the prescribed proportion and period. In addition, the reserve requirement ratio is set by the People's Bank of China and adjusted according to the need to ease or tighten monetary policy.

Article 32 of the Commercial Bank Law stipulates that commercial banks shall, in accordance with the regulations of the People's Bank of China, deposit reserve funds with the People's Bank of China and reserve sufficient reserves.

Statutory reserve policy: The central bank adjusts the deposit reserve ratio paid by commercial banks, changes the currency ratio, controls the credit creation ability of commercial banks, and ultimately affects the amount of money in the market. If the central bank raises the reserve requirement ratio, it will reduce the amount of money, increase market interest rates, and reduce the chain of investment and consumption demand, which will have a negative impact on the company's operation, and the company's stock price will tend to be the first.

Reserve funds are monetary funds set aside by banks and certain financial institutions to meet the withdrawal of deposits and the liquidation of funds by customers. The reserve requirement ratio as a ratio of reserves to total deposits or liabilities is the reserve requirement ratio. The reserve requirement ratio is divided into statutory reserve ratio and excess reserve requirement ratio.

The statutory reserve ratio refers to the part that financial institutions hand over in accordance with the proportion prescribed by the bank, and the bank aims to shrink or expand credit by increasing or lowering the statutory reserve ratio of the bank.

The statutory reserve requirement policy is often considered one of the most aggressive tools of monetary policy and is mandatory. By adjusting the statutory reserve ratio, the bank can effectively control the amount of money, and the statutory reserve ratio is one of the important factors that determine the size of the currency multiplier and thus the ability to multiply the derived deposits. It is generally believed that raising the statutory reserve ratio directly freezes a certain amount of liquidity of banks on the one hand; On the other hand, it affects the currency multiplier and produces a multi-fold contraction effect, even if commercial banks and other depository institutions hold excess selling reserve requirements for various reasons, the adjustment of the statutory reserve ratio will also have an effect.

Therefore, the statutory reserve policy is known as the "giant axe" of monetary policy.

The statutory reserve requirement refers to the deposit requirement that the bank must deposit at a certain rate according to the law to the first deposit of the bank. The proportion of the statutory reserve requirement of Qi Shiguo, a depository financial institution in China, is usually determined by the People's Bank of China and is known as the statutory reserve ratio.

Mechanism of Statutory Reserve Policy: The statutory reserve system has become an important means for the state to regulate the economy, and it is a system for the first bank to control the credit scale of commercial banks. The purpose of implementing the statutory reserve requirement is to ensure that commercial banks can have sufficient solvency when they suddenly withdraw large amounts of bank deposits.

**Banks control the reserve ratio of commercial banks, which affects the credit scale of banks.