Learn what reserve requirement means, how it differs from capital rules, and why it has been used as a liquidity and monetary-policy tool.
A reserve requirement is the rule that determines how much of certain deposit liabilities banks must hold as reserves rather than lend out or invest elsewhere.
The reserves may be held as cash or in qualifying balances with the central bank, depending on the jurisdiction and system design.
The core relationship is:
If eligible deposits are $100 million and the reserve ratio is 10%, required reserves would be $10 million.
Reserve requirements historically served several purposes:
They are closely linked to the basic mechanics of fractional reserve banking.
This distinction matters.
A bank can satisfy reserve rules and still have weak capital. It can also have strong capital but still face liquidity pressure.
That is why banking stability depends on several layers of protection, not just one.
When reserve requirements are raised:
When reserve requirements are lowered:
In practice, many modern central banks now rely more heavily on other tools, but the concept remains important for understanding monetary control and banking structure.
Reserve buffers can matter during stress, but reserve requirements alone do not eliminate the possibility of a bank run.
Confidence, asset quality, funding structure, and central-bank support all matter too.