Required minimum reserves, often referred to as reserve requirements, were regulations that obligated banks to hold a certain percentage of their customers’ deposits as cash or deposits at the Federal Reserve. These funds could not be lent out, serving as a liquidity buffer to protect banks against sudden withdrawals and to help the Federal Reserve control the money supply.
For example, if the reserve requirement was 10%, a bank with $1 million in deposits had to hold $100,000 in reserves and could lend the rest. This balance helped maintain financial stability and support monetary policy efforts by adjusting how much money banks could circulate.
In March 2020, amid the economic uncertainty caused by the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement for all deposit categories to zero percent. This unprecedented move aimed to free up capital, encouraging banks to increase lending to support households and businesses during the crisis. Today, U.S. banks are not legally required to hold any specified amount of their deposits in reserve.
Despite the elimination of mandatory reserves, banks continue to hold “ample reserves” voluntarily to ensure smooth operations, including processing transactions and meeting unexpected withdrawal demands. Additionally, banks must meet other regulatory safeguards such as capital requirements — rules that mandate banks maintain enough capital to absorb losses and sustain financial health. For more detail on capital requirements, see FinHelp’s Capital Requirements article.
Depositors’ funds remain secure thanks to Federal Deposit Insurance Corporation (FDIC) insurance, which protects deposits up to $250,000 per depositor, per insured bank, per account ownership category. This insurance is independent of reserve requirements and provides a critical safety net for individuals. To learn more, visit Federal Deposit Insurance Corporation on FinHelp.io.
The Federal Reserve now primarily uses more modern monetary policy tools, such as the interest on reserve balances (IORB) rate, to influence bank behavior and control the money supply. You can read more about this mechanism in FinHelp’s article on Reserve Requirement Waiver.
In summary, while the reserve requirements have been historically important, today’s banking system relies on a combination of voluntary reserves, capital requirements, and insurance protections to ensure liquidity and safety.
Sources:
- Federal Reserve Board, Reserve Requirements: https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- FDIC Deposit Insurance Basics: https://www.fdic.gov/deposit/deposits/
- Investopedia, Reserve Requirements: https://www.investopedia.com/terms/r/reservereq.asp