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But this too has problems, some of which are the same as with a statutory cash ratio:
Since 1984, when the institute began keeping such records for domestic funds, the cash ratio had never before this year fallen below 7.4 percent.
These cash ratio deposits are non-operational: in other words, the banks cannot withdraw them.
Suppose the bank has the original balance sheet and that the minimum cash ratio is increased to 12 per cent.
All banks need to maintain a cash ratio large enough to meet the cash requirements of their depositors.
Today the only statutory requirement is the per cent cash ratio that banks must keep with the Bank of England.
The bankers' deposits item in the balance sheet refers to the cash ratio and operational balances of the banks.
There is one major problem with monetary base control, with or without a statutory cash ratio, that is perhaps the most serious of all.
The banks have tended to choose a lower liquidity ratio over the years, and certainly a lower cash ratio.
Notice that, while is the public's cash ratio, while is the banks' deposit ratio,.
Unless cash ratios were imposed on every single financial institution, the control of certain institutions' lending would merely shift business to other uncontrolled institutions.
As with cash ratios, banks could hold reserve assets above the statutory minimum, thus helping them to resist a squeeze on reserves (but not indefinitely).
It follows that there is an inverse relationship between the cash ratio and the credit multiplier and, therefore, the volume of bank credit.
To illustrate the principle of credit creation, consider a hypothetical example of a closed economy with a single monopoly bank which observes a minimum cash ratio.
Notice that very often "Acid test" refers to Cash ratio, instead of Quick ratio:
Suppose, in the simplest possible case, banks operate a rigid 10 per cent cash ratio and just have two types of asset: cash and advances.
If banks operated a rigid 12 per cent cash ratio and the government reduced the supply of cash by £1 million, how much must credit contract?
To avoid this problem and to allow the greatest freedom of competition between financial institutions, the alternative is to use monetary base control with no statutory cash ratio.
But the portfolio managers made the conscious decision to allow the cash ratios to rise because they were far more nervous than were the mutual fund shareholders.
For a time, therefore, they could respond to any restriction of cash by the authorities by simply reducing their cash ratio toward the minimum, rather than having to reduce credit.
Just as with a cash ratio, the authorities could impose a statutory liquidity ratio or they could merely allow banks to set their own prudent liquidity ratio.
The Reserve Bank of India changes the cash ratio from time to time which in turn affects the amount of funds available to be given as loans by commercial banks.
Because growth and income funds hold stocks and bonds, often in the form of Treasury notes, as well as cash, their cash ratios tend to be lower than the rest of the group.
Table 4 shows the bank's initial position; it has total deposits amounting to £10,000 and is just maintaining its 10 per cent cash ratio by holding in its tills £1,000 in cash.
The quantitative lending controls were abolished and the liquidity and cash ratio requirements as devices for regulating credit were to be replaced by the reserve asset ratio (this will be considered further).
In other words, the banks operate a 10 per cent liquidity ratio.
Since 1981, however, banks have been left to decide their own prudent liquidity ratios.
Banks therefore require to hold a lower liquidity ratio, and can create more credit.
Before 1981 statutory liquidity ratios were imposed on the banks.
Liquidity ratios measure the availability of cash to pay debt.
The statutory liquidity ratio is a term most commonly used in India.
If a financial institution's liquidity ratio is too high, it will make too little profit.
They may simply go ahead and expand credit, and accept a lower liquidity ratio.
The liquidity ratio is the result of dividing the total cash by short-term borrowings.
For example, in a pure cash deal (financed from the company's current account), liquidity ratios might decrease.
It is the inverse of the liquidity ratio.
Exceeding $79.5 million must have a liquidity ratio of 10%.
In this simple world, therefore, the money multiplier is the inverse of the liquidity ratio (L).
Banks may choose a different liquidity ratio.
Liquidity ratio, expresses a company's ability to repay short-term creditors out of its total cash.
If banks choose to hold a lower liquidity ratio, they will have surplus liquidity.
If banks' liquidity ratios are now below the prudent minimum, they will have to make a multiplied contraction in credit.
High liquidity ratios indicate short-term financial strength but do not measure efficiency of utilization of resources.
Banks, being prepared to operate with a lower liquidity ratio, were only too pleased to supply the credit being demanded.
Banks may vary their prudent liquidity ratios.
Furthermore, the authorities did not control the supply of all the eligible liquid assets which could count towards the banks' liquidity ratio.
Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or govt.
Liquidity ratios show that both companies were financially stable, but Exxon was in a better situation than Mobil.
There are three types of liquidity ratio:
Capital adequacy ratio remained strong at 19 percent, while the liquidity ratio was 55 percent.