By law, deposit money banks are obliged to hold a specified proportion of their deposits in cash or near-cash assets known as reserve requirements. Banks are prohibited from using such reserves to extend loans to customers. An increase in this requirement would limit the amount of loans that a bank is able to extend to its clients, whereas a reduction would increase the amount of funds available for lending. The Central Bank then, is able to influence the supply of money by either increasing or decreasing this requirement.
There are two types of reserve requirements employed by the Bank. In accordance with the Central Bank of The Bahamas Act, 2000, banks are required to maintain primary reserves referred to as the 'Statutory Reserve', against their Bahamian dollar liabilities. Since coming into force in 1974, the ratio has been unchanged at 5.0%, although the Bank does have the authority to raise it to 20.0%.
The Central Bank is also empowered to impose a secondary reserve, called the Liquid Asset Ratio(LAR), which mandates banks to maintain an average ratio of liquid assets in relation to their Bahamian dollar deposit liabilities. The LAR is currently set at 20.0% of demand deposits, 15.0% of savings and fixed deposits, and 15.0% of borrowings due to or from the Central Bank as well as inter-bank.