A proportion of the total deposit that a commercial bank must keep as cash and convertible paper is

The proportion of the total deposit that a commercial bank must keep as cash and convertible paper is called the liquidity ratio. This is a requirement set by the central bank of a country to ensure that banks have enough liquid assets to meet their obligations to depositors, in case there is a sudden demand for withdrawals. For example, if the liquidity ratio is set at 20%, then a bank with $100 in deposits would need to hold $20 in cash or convertible paper. The remaining $80 could be used for lending or other investments. The liquidity ratio is important for maintaining financial stability and preventing bank runs. If banks did not have to hold a certain proportion of their deposits as liquid assets, they could potentially lend out all of their deposits, leaving them vulnerable to a sudden demand for withdrawals from depositors. The liquidity ratio helps ensure that banks have enough liquid assets on hand to meet their obligations and maintain confidence in the banking system.