What is the legal ratio of liquidity?

The legal ratio of liquidity is a type of financial calculation that includes the determination of the total amount of liquid assets that the institutions must hold in reserve in order to operate in accordance with the banking regulations established by the national government. Types of assets involved in this reserve may be cash, expensive metals or other types of approved securities found on lists provided by the relevant regulatory agency. Cash, which is required for the operation of the central bank, is not usually included among liquid assets that form the statutory liquidity ratio.

While there are certain variations on the formula for determining the statutory liquidity ratio, almost any approach will include the identification of a certain percentage of total demand and time obligations related to banking. Time obligations are simply obligations of the institution that are due at the moment, along with any obligations that grow in the aire period due to the maturity of these obligations. Sum of demandY and time obligations are multiplied by an identified percentage, providing the legal ratio of liquidity and defining the amount of assets that must be left at hand.

There are several reasons why some nations have a type of legal ratio of liquidity. One has to do with a certain control of the bank loan level, which is issued by a specific institution. By using the ratio to identify limits that are unlikely to increase the probability of bank failure, the government helps to protect consumers and the economy in general. At the same time, the legal ratio of liquidity is a long way to help protect any investments that government agencies have in these financial institutions. Creating cash ratio, which is considered fair in terms of current economic condition means that the chances of bank insolvency are maintained at a minimum and the potential to undergo an economic decline with a smaller totalDamage improves.

As regards the determination of the statutory liquidity ratio, most governments will assess the assets of the financial institution and identify a specific amount of assets that must be earmarked as financial reserves, except those associated with the central bank. This not only helps to protect the interests of consumers, but also gives the government one more way to help move the economy in the most sought -after direction. The ratio may be increased if forward the driving inflation and may be reduced if the goal is to move the economy and eventually by recession by supporting financial growth in the country.