Banks typically must keep a portion of deposits as reserves to ensure liquidity and stability. This rule, known as the reserve requirement, prevents bank runs and helps the central bank control money supply. A reserve requirement waiver temporarily lifts these limits, enabling banks to lend a larger share of deposits.
The Federal Reserve announced a historic zero-percent reserve requirement in March 2020 amid the COVID-19 pandemic, effectively waiving the previously tiered reserve percentages. This shift freed significant funds for lending, aiming to support households and businesses by improving access to credit.
The zero reserve requirement does not mean banks hold no cash; they still maintain vault cash and meet capital requirements for safety, per regulations. Moreover, the Fed now uses more precise tools like the interest on reserve balances (IORB) rate to manage monetary policy, controlling incentives for banks to lend or hold reserves.
This policy affects consumers and businesses by potentially making loans more accessible and affordable. Increased lending supports economic growth by facilitating mortgages, auto loans, business lines of credit, and personal financing.
Although the reserve requirement could be reinstated if the Fed deems necessary, the current preference is to rely on flexible tools like IORB. The waiver represents a modernization of U.S. banking liquidity regulation toward enhancing credit availability without compromising stability.
For related topics, see our Cash Reserve Requirement entry explaining traditional reserve rules and Short-Term Interest Rates for insight into other key monetary policy tools.
Sources:
- Federal Reserve: Reserve Requirements (https://www.federalreserve.gov/monetarypolicy/reservereq.htm)
- Investopedia: Regulation D (https://www.investopedia.com/terms/r/regulationd.asp)
- St. Louis Fed: The Fed’s New Monetary Policy Tools (https://www.stlouisfed.org/open-vault/2020/september/fed-new-monetary-policy-tools-ample-reserves)
(Information accurate as of 2025)