refers to cash reserve maintained by banks to back up loans created

ensures ability to honour withdrawals made by depositors

lower cash reserve ratio, greater ability to provide loans

Central Bank sells/buys back treasury bills or short-term gov. bonds

buyers pay with cheques drawn on commercial banks or deposit cheques received into commercial banks

⬇/⬆ cash holdings of commercial banks and hence their credit-creating ability and money supply in economy

Bank's Cash or Liquidity Ratio
gov. can impose statutory minimum reserve requirements

• lower for expansionary policy

Central Bank can require banks to place with it a % of their deposits in a special account

Special deposits are frozen
cannot be withdrawn until authorities release them

Influx of short term capital (hot money)
curtail bank credit by ⬆interest rate to rate higher than that of other countries
-> foreigners may invest funds in domestic banks to earn higher return

bad times, pessimism, banks willing to lend but no borrowers

good times, strong D for credit, banks can find ways to circumvent liquidity restrictions to provide loans
eg. arrange for customers to borrow from overseas branches that are outside the jurisdiction of Central Bank

Print money to pay for bonds purchased by Central Bank, to inject more cash to boost liquidity
Unconventional since potentially highly inflationary

global financial crisis: interest rate near zero, cannot lower further

commercial banks also unable and unwilling to lend due to bad debts incurred

some of the injected cash finds its way into banking system as cash deposits, puts banks in better position to provide loans

massive capital outflow

• massive cash injection and very low interest rate
  -> invest in places with higher return
  -> asset bubbles in other countries
  hence reduces inflation