Reserve requirement

What is reserve requirement?

This is a regulation which sets the minimum amount of money that banks must hold in reserve. It’s usually decided by a country’s central bank, and based on the amount of deposits each commercial bank holds.

Where have you heard about reserve requirement?

The UK hasn’t had a reserve requirement since 1981, when the reserve ratio of 1.5% was abolished. But in the US, the Federal Reserve governors set the reserve requirement, as well as the interest banks are paid on any excess reserves.

What you need to know about reserve requirement...

In exchange for being allowed to lend money out to customers, banks are often required to keep a certain amount of deposits in reserve to cover potential withdrawals. This minimum is usually a percentage of the deposit liabilities owed to customers. The reserves usually consist of cash held in the bank's vaults, and its balance held with its central bank. UK banks used to set voluntary reserve targets in contracts with the Bank of England. This was abolished with the introduction of quantitative easing and interest on excess reserves in 2009.