The reserve requirement (or cash reserve ratio) handled by Top Accounting Firms in Singapore indicates the percentage of money from a bank to be maintained in liquid reserves. The amount can be used to invest or make loans. The monetary authorities of each country establish a minimum ratio of reserves that all banks have to fulfill. In some cases, financial institutions can be placed above the minimum fixed legal requirement.
Other names of this coefficient are bank reserve, legal reserve ratio and reserve ratio. Banks do not keep money in them because they keep their funds tied up in profitable facilities, so all banks take money deposited and seek to invest, either through loans, investment in securities (stock ) or debt (bonds).
Obviously, a bank cannot invest all deposits that savers will deliver as that could cause bankruptcies or liquidity issues. To prevent these situations (among other reasons) the regulations issued by the central bank requires them to maintain a percentage of deposits in their possession.
The cash reserve ratio is equal to the ratio between the assets of the banking system or reserves delivered by savers deposits to the bank. This means that a coefficient of 2% (common in the Euro zone) means that for every $100 put into savings in an entity, it maintains $2 as legal reserves and has the ability to invest or grant loans worth $98.
Reservations are embodied in two ways, on money that banks keep in their safes (cash reserves), which is an additional value, and that deposited at the central bank, which usually represent the most important.
The purpose of the reserve requirement is to ensure the short-term solvency of banks (avoid bankruptcy of the banking system) and prevent the multiplication of funds in a runaway. The higher the cash ratio the unlikely that a bank failure will occur. But also a smaller proportion of loans per unit of deposit means its profitability benefits will be lower.
Control and monitoring
However, in the last few years, developed countries, particularly the United States as well as international organizations, such as the OECD (Organization for Economic Cooperation and Development) and the Financial Action Task Force (FATF) began a significant shift towards routine offshore control and monitoring.
Their main focus centered around the fact that there is the lack of transparency, no public registry in low-tax territories. There is no indication of who actually owns a given company. International organizations have no right to give binding instructions and cannot apply sanctions, however, some offshore jurisdictions have begun introducing legislation in line with the recommendations of international organizations.
FATF main areas of struggle regarding prevention of laundering of capital is reflected in the 40 recommendations. The recommendations were adopted in April 1990 and undergo some changes almost every year. If you have more questions and to understand more visit a accounting services Singapore.
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