Consider a simple model like the one we studied in class, featuring three agents: a central bank, a representative private bank and a representative household. The private bank starts with $1000 in loans, $300 in government bonds (we will simply call these, securities) and $150 in reserves. On the liability side, the bank faces $1000 in deposits. The Central bank has $500 of securities while facing liabilities for $150 in reserves (the ones that the private bank has) and $250 in currency under circulation The household holds currency for $250 and has deposits at the private bank for $1000. It faces no liabilities. The reserves-to-deposit ratio that mandates the private bank's lending behavior is given by = R E = 0.1 0.05 = 0.15 = Reserves Deposits. Where R = 0.1 is the required reserve ratio (dictated by legal regulation) and E = 0.05 is the excess reserve ratio, which means that the bank wants to hold slightly above the minimum requirement (so that it can successfully deal with both liquidity and credit risk)