With a portion of the funds received from its clients` deposits, it is calculated by multiplying the first maturity by reversing the cash ratio. The European Central Bank sets minimum reserves for all euro area countries to be filled by all financial institutions, by multiplying the reserve ratio of each category of liabilities, which is therefore different for each type of deposit, by the balance of those liabilities. [3] [4] Banks do not keep the money deposited there, because it is less profitable to keep the funds silent in their facilities, so each bank takes a large part of the deposited money and tries to invest it either through loans or securities (stock exchange) or debts (bonds). Obviously, this part of the bank`s reserve deposits cannot be used for loans (or for other purposes such as investments). They must be kept in cash form and can be deposited in the safe deposit box of the same bank, in cash or in bank accounts at the central bank. Yes, how the cash ratio affects the money multiplier is very relevant. Before we see a small example, we need to define another coefficient: the ratio of cash in the hands of the public. This ratio is the same: a bank cannot invest all the deposits that savers give it, as this can lead to liquidity shortfalls or bankruptcies of institutions. In order to avoid these situations (among others), regulations issued by the central bank require banks to hold a percentage of the deposits in their possession. If we look at our current account online, we see an accounting note that the bank has created for the loan amount, but this does not mean that there are more notes and coins in the country`s economy than before. In this section, we will analyze the impact of money creation by banks on the volume and variation of the money supply, in order to present ourselves in the next section in a new concept that reflects how the central bank must control the money supply (the monetary base).
In this way, banks can offer individuals a smaller number of loans when statutory cash ratios increase. If such a change occurs, institutions must take steps to maintain their volume of liquid reserves in branches. This means that a coefficient of 1% (common in the eurozone today) means that for every €100 we deposit in savings with a company, it holds €1 of legal reserve (CNEC) and has the capacity to invest or grant loans worth €99. In this way, we saw that from €1,000, €1,710 were newly created (€900 + €810) that did not exist before. Today we have a total of €2,710: €1,000 in notes deposited by the first depositor in the first bank and €1,710 created by the bank by granting loans. A footballer receives 96 € from a spot made in Paris, so he brings the money to Spain, since e = 20%, keeps 16 € for his expenses and between 80 € at the bank (16/80 = 20%). As an instrument of monetary policy, the legal cash ratio in Spain has gone through two different periods. The first, which covers from its introduction until 1990, the statutory liquidity ratio in Spain has been mainly characterised by its high level, reaching 20% of eligible liabilities, allowing the Bank of Spain to take advantage of variations in its level, as it has sometimes done, to have a significant impact on the liquidity of the economy. The second period, from March 1990 to the current situation, was characterised by a substantial reduction in its level, during which two tranches were fixed: the first, undisbursed, which remained in force until 31 December 1998, and a second, provisional and remunerated tranche, which remained in force for only two months. and this should be covered by certificates issued by the Bank of Spain with maturities between 1993 and 2000. During this second period, the cash ratio was therefore at the so-called technical level of cash, so that it lost its importance as an instrument of monetary policy and remained only a mechanism to ensure the liquidity of companies subject to its compliance.