Reserve Requirement
The minimum fraction of deposits a bank must hold in reserve rather than lend out.
What is Reserve Requirement?
A reserve requirement is a regulation requiring commercial banks to hold a minimum fraction of their customer deposits in reserve — either as cash in their vaults or as deposits at the central bank — rather than lending it out. Historically, the reserve requirement was a key tool for controlling the money supply: raising it reduced banks' ability to create loans and credit, tightening the money supply, while lowering it had the opposite effect. In March 2020, the US Federal Reserve reduced reserve requirements to zero, making them effectively obsolete as a policy tool; instead, the Fed now primarily uses interest on reserve balances to influence bank behavior and monetary conditions.
Example
Before 2020, US banks with more than $127.5 million in deposits were required to hold 10% in reserve. A bank with $1 billion in deposits had to keep at least $100 million idle. When the Fed cut the requirement to 0% in 2020 to encourage lending during the COVID-19 crisis, banks could theoretically lend 100% of their deposits, though other regulatory capital requirements still applied.