The cash reserve requirement historically represented a central banking policy tool obligating banks to keep a fraction of their deposit liabilities in reserve. This reserve ensured banks could cover customer withdrawals and allowed central banks to influence the broader money supply and economic activity.
In the United States, the Federal Reserve set specific reserve ratios based on the size and type of deposits. For example, a 10% reserve ratio meant banks needed to keep $100 on hand for every $1,000 deposited. These reserves could be held as physical cash or as balances in the bank’s account at the Federal Reserve.
However, on March 26, 2020, the Federal Reserve announced it was reducing reserve requirements to zero for all depository institutions. This policy shift was part of a broader strategy during the early stages of the COVID-19 crisis to ease liquidity constraints and support the flow of credit to households and businesses.
The Fed’s decision reflected a recognition that reserve requirements had become less effective in modern monetary policy, compared to tools like interest on excess reserves (IOER) and open market operations, which provide more precise control over short-term interest rates and money supply.
Although the formal reserve requirements were eliminated, banks still maintain reserves for practical purposes: daily cash flow management, payment processing, and meeting other regulatory standards including capital and liquidity requirements under banking regulations.
Globally, many central banks continue to use reserve requirements to manage liquidity and monetary policy, making it a relevant concept for understanding international banking systems. Countries such as China, India, and members of the Eurozone employ varied reserve ratios as policy levers.
For everyday consumers, the removal of the reserve requirement means banks have greater flexibility to lend money, but it does not mean your deposits are less safe. U.S. bank deposits remain protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank. Moreover, other regulatory frameworks ensure banks maintain adequate capital and liquidity buffers to operate safely.
In summary, the cash reserve requirement was a key regulatory measure influencing bank liquidity and monetary control, now supplanted by advanced tools and regulations that better suit today’s complex financial environment.
Learn more about the Federal Reserve’s role in monetary policy and bank regulations in our articles on Federal Reserve and Federal Deposit Insurance Corporation (FDIC).
For authoritative details, visit the Federal Reserve’s official page on reserves: https://www.federalreserve.gov/monetarypolicy/reserves.htm and FDIC deposit insurance: https://www.fdic.gov/deposit/deposits/.
Sources:
- Board of Governors of the Federal Reserve System, “Federal Reserve Focuses Monetary Policy on Interest Rates,” March 15, 2020. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm
- Investopedia, “Reserve Requirement.” https://www.investopedia.com/terms/r/reserverequirement.asp
