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Simple English definitions for legal terms
primary reserve ratio
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A quick definition of primary reserve ratio:
Primary Reserve Ratio: This is a number that shows how much money a bank has in reserve compared to how much money it has lent out. It's important for banks to have enough money in reserve to cover any losses or unexpected expenses. The primary reserve ratio helps regulators and investors understand how financially stable a bank is.
A more thorough explanation:
The primary reserve ratio is a financial term that refers to the amount of money a bank or financial institution must keep in reserve to cover potential losses. It is also known as the reserve ratio.
For example, if a bank has $100 million in deposits, and the primary reserve ratio is 10%, the bank must keep $10 million in reserve to cover any potential losses. This means that the bank can only lend out $90 million of the $100 million in deposits.
The primary reserve ratio is important because it helps ensure that banks have enough money on hand to cover any unexpected losses. If a bank does not have enough reserves, it may be forced to borrow money or sell assets to cover its losses, which can be costly and damaging to the bank's reputation.