Definition of Cash Ratio – The ratio of cash to total liabilities a bank will hold. For example, suppose that a bank has deposit of £100 billion. If if has a cash ratio of 1%, it will need to hold £1billion on cash reserves.
A cash ratio determines how much credit can be created from deposits. It also determines the profitability of a bank. If cash ratios are higher then banks will be less profitable. However, higher cash ratios do enable greater security.