Bank reserve ratio

It is a part of bank deposits which the bank won’t lend to its customers. The mentioned part should be held internally or deposit with the central bank. The minimum reserve requirement is established by central bank so that, this organization could execute both expansionary and contractionary monetary policy by cutting and increasing reserve ratio. The last regulation about reserve rate in Iran has established in 1972 According to this regulation, Reserve Requirement Ratio (RRR) is one of the CBI’s indirect instruments of monetary policy. Banks are obliged to deposit part of their liabilities in the form of deposit with the CBI. Through increasing/decreasing this ratio, the CBI contracts/expands the broad money. According to Article 14 of the Monetary and Banking Law of Iran, the CBI is authorized to determine RRR within 10 to 30 percent depending on banks liabilities composition and field of activity.

The theory that a reserve requirement can execute as a tool of monetary policy is frequently found in economics sources. The higher the reserve requirement is set, the theory supposes, the less funds banks will have to loan out, leading to lower money creation and perhaps ultimately to higher purchasing power of the money previously in use. The effect is multiplied, because money obtained as loan proceeds can be re-deposited; a portion of those deposits may again be loaned out, and so on. The mentioned phrase is exactly the definition of multiplier effect of money.

The last regulation about reserve rate in Iran has established in 1972. During last 10 years, bank reserve ratio has been decreased gradually, for instance the bank reserve rate had been decreased from 17 percent in 2007 to 10 percent in 2015. However, the reserve rate was about 30 percent in last years in order to control liquidity and bankruptcy.

According to Ali Taybenia, the minister of economy of Iran’s recent press conference, the government plans to decrease reserve ratio to zero because he believes this monetary instrument is an out of date instrument in international economy.

To conclude after cutting bank reserve ratio from 13 to 10 percent recently, the Central Bank of Iran intends to cut it one more time and the bank reserve regulation is being revised after 43 years. This approach improves banks power in lending money and could decrease interbank rate in near future which might lead to significant decrease in banks interest on loans.