Ans_Reserve Requirement and How It Affects Interest Rates: Why the Fed removed the reserve requirement

Q1: What is the maximum banking multiplier for a bank with $200 million deposits before the policy change?

A: Maximum banking multiplier = 1 / required reserve ratio

= 1 / 10%

= 10

Q2: What is the maximum banking multiplier for a bank with $200 million deposits after the policy change?

A: Maximum banking multiplier = 1 / required reserve ratio

= 1 / 0%

= infinity

Theoretically, the banks in the US can create an infinite amount of deposits by holding 0 reserves. But of course, when someone withdraws money from the bank, the bank has to call loans to fulfil the withdrawal request. Eventually, the deposits will shrink to the same extent.

Q3: How does the policy affect the amount of deposits in the banking system?

A: When FED lowers the required reserve ratio, there will be a surplus of reserves as the actual reserve is larger than the required reserve. That means there is more excess reserve. To earn more profit, the banking can lend out more loans to borrowing parties, which continue the credit creation process. As a result, more deposits are created in the banking system.