A reserve requirement is a central-bank rule that sets how much of certain bank liabilities a depository institution must hold in reserve. In the United States, the Federal Reserve reduced all reserve requirement ratios to zero effective March 26, 2020. The rule remains important for understanding how monetary policy used to work, but it is not a current binding reserve ratio for U.S. banks.
What is a reserve requirement?
A reserve requirement is the amount of reserve assets a covered depository institution must hold against specified liabilities, such as certain customer deposits. The exact calculation depends on which liabilities count and the ratios set by the relevant central bank. Rules differ by country; the dates and policies below describe the U.S. Federal Reserve system.
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Under the Federal Reserve Act, the Board of Governors has authority to set reserve requirements within statutory limits. Regulation D, codified at 12 CFR Part 204, implements the rules. Covered institutions include commercial banks, savings banks, savings and loan associations, credit unions, and certain U.S. branches and agencies of foreign banks.
What is the reserve requirement in the United States now?
All U.S. reserve requirement ratios are currently zero. The Federal Reserve made the change effective March 26, 2020, eliminating reserve requirements for U.S. depository institutions. Its reserve requirements page lists net transaction accounts at 0 percent effective that date. Nonpersonal time deposits and Eurocurrency liabilities had already been subject to a 0 percent ratio since December 27, 1990.
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The Fed announced the change on March 15, 2020, and it took effect at the start of the next reserve maintenance period. Historical H.3 data documentation records required-reserve reporting items as zero beginning with the two weeks ending April 8, 2020.
Before the 2020 change, transaction-account ratios depended on account size: a zero-percent exemption amount applied first, followed by a 3 percent ratio on balances above the exemption up to a low reserve tranche, and a 10 percent ratio on balances above that tranche. Those are historical figures, not current requirements. The Fed estimated that setting the ratios to zero reduced required reserves by $200 billion; that figure measures required reserves released, not loans made or economic output produced.
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How did reserve requirements work?
When requirements applied, a bank calculated required reserves using the liabilities covered by the rules and the applicable ratios. It could meet the requirement with vault cash; if vault cash was insufficient, it held the remaining required amount as a balance at a Federal Reserve Bank.
In a simplified example, if a particular deposit liability were subject to a positive reserve ratio, the bank would have to hold a specified fraction of that liability in eligible reserves. The actual U.S. calculation historically depended on account categories, exemptions, and tranches, rather than one universal percentage on every deposit.
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How can reserve requirements affect the economy?
In a scarce-reserves system, a higher required ratio can leave a bank with less liquidity available for other uses, while a lower ratio can free some liquidity. That can influence banks’ capacity or incentive to lend and, in turn, the creation of bank deposits. It is a possible transmission channel, not a promise that every dollar released becomes a dollar of new lending.
The familiar money-multiplier story suggests a fixed chain in which a change in reserves produces a predictable multiple change in lending or money. Federal Reserve research explains why that mechanical account has important limits: actual lending depends on banks’ decisions, borrowers’ demand and creditworthiness, and the monetary-policy framework, among other factors. A reserve ratio alone therefore cannot predict loan growth, money growth, or GDP.
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In its March 15, 2020 announcement, the Federal Reserve said setting reserve ratios to zero would help support lending to households and businesses. That was the Board’s stated intended effect; the announcement does not establish a specific realized increase in lending or economic growth caused by the change.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why did the Fed set reserve requirements to zero?
The change reflected the Fed’s move to an ample-reserves framework. In that framework, reserve requirements do not play a significant role in monetary-policy implementation. The Fed says it primarily controls the federal funds rate and other short-term rates through administered rates, without needing to actively manage the supply of reserves.
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Outbyte Driver Updater FREEFix the driver behind crashes, sound loss and screen glitchesFind Drivers →Outbyte PC Repair FREEClear out junk files and repair common Windows errorsFree Scan →The Board noted that reserve requirements had once played a central role by creating stable demand for reserves. That role diminished as the operating framework changed. In an ample-reserves system, the central bank can steer short-term rates through administered rates rather than relying on reserve scarcity and a binding requirement to drive banks’ demand for reserves.
What a zero reserve requirement does not mean
A zero reserve requirement does not mean banks have no other regulatory constraints, do not hold reserves, or can ignore liquidity management. Reserve requirements are distinct from capital and liquidity regulation. The Fed’s 2020 announcement discussed capital and liquidity buffers separately from the reserve-ratio change; banks continue to manage liquidity and meet other applicable requirements.
It also does not mean that the Fed’s 2020 action itself created a measured amount of new credit. The $200 billion figure is the Fed’s estimate of the reduction in required reserves, not a measure of loans, deposits, output, employment, or inflation attributable to the change.
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