The cash ratio is defined as the ratio of cash and liquid assets to what?

The cash ratio is defined as the ratio of cash and liquid assets to what?

• A. the deposits held by the bank
• B. The bank's total reserves
• C. The equity of the bank
• D. The loans outstanding

Answer: (A)

The cash ratio shows how much cash and other near-cash assets a bank has available to cover the money customers have deposited and could withdraw. It measures short-term liquidity by comparing liquid resources to the deposits that could leave the bank. Deposits are the right denominator because they represent potential outflows from customers, so the ratio indicates whether the bank has enough liquid funds to meet those withdrawals. Using total reserves as the denominator would focus on reserves rather than customer withdrawals; equity isn’t a liquidity measure, and loans outstanding are illiquid assets, not readily available cash.

The cash ratio shows how much cash and other near-cash assets a bank has available to cover the money customers have deposited and could withdraw. It measures short-term liquidity by comparing liquid resources to the deposits that could leave the bank. Deposits are the right denominator because they represent potential outflows from customers, so the ratio indicates whether the bank has enough liquid funds to meet those withdrawals.

Using total reserves as the denominator would focus on reserves rather than customer withdrawals; equity isn’t a liquidity measure, and loans outstanding are illiquid assets, not readily available cash.