Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A higher reserve ratio increases lending capacity, which can lead to lower capital adequacy.
B
A lower reserve ratio restricts interbank lending but ensures higher capital adequacy.
C
A higher reserve ratio limits the amount available for interbank lending, which may affect capital adequacy.
D
There is no relationship between reserve ratio, interbank lending, and capital adequacy.
Understanding the Answer
Let's break down why this is correct
Answer
A bank's reserve ratio is the percentage of its deposits that it must keep as reserves, either in cash or as deposits with the central bank. When this ratio is high, the bank has less money available to lend out to other banks in the interbank market, which can limit its ability to earn interest from those loans. Conversely, if the reserve ratio is low, the bank can lend more money, but it must be careful to maintain enough reserves to meet withdrawal demands and regulatory requirements. For example, if a bank has a reserve ratio of 10% and $1 million in deposits, it must keep $100,000 in reserves, allowing it to lend the remaining $900,000. Balancing these factors is crucial for banks to operate efficiently while ensuring they remain financially stable and comply with capital adequacy standards.
Detailed Explanation
A higher reserve ratio means banks must keep more money on hand. Other options are incorrect because This answer suggests that a higher reserve ratio increases lending, which is not true; This option says a lower reserve ratio restricts lending, but actually, it allows more lending.
Key Concepts
reserve ratio
interbank lending
capital adequacy
Topic
Bank Reserve Management
Difficulty
hard level question
Cognitive Level
understand
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