Commercial banks are required by law to hold reserves. These reserves are specified as percentages of a bank's

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deposits. This requirement is known as the reserve requirement.

To determine the amount of reserves a commercial bank is required to hold, you need to know two things: the reserve ratio and the bank's deposits.

1. Reserve Ratio: The reserve ratio is a predetermined percentage set by the central bank or regulatory authority. It specifies the proportion of a bank's deposits that must be held as reserves. For example, if the reserve ratio is 10%, it means that a bank must hold 10% of its deposits as reserves.

2. Bank's Deposits: The deposits of a commercial bank refer to the total amount of money deposited by its customers. This includes both demand deposits (checking accounts) and time deposits (savings accounts, fixed deposits, etc.).

To calculate the required reserves, you can use the following formula:

Required Reserves = Reserve Ratio x Bank's Deposits

For instance, if a bank has deposits of $1,000,000 and the reserve ratio is 10%, the calculation would be:

Required Reserves = 0.10 x $1,000,000 = $100,000

Therefore, the bank would be required to hold $100,000 in reserves.

It's important to note that banks can choose to hold reserves above the required amount, which is known as excess reserves. These excess reserves provide a buffer for the bank's liquidity and can be used to meet unexpected cash demands or to lend out to borrowers.