Reserve requirements are Federal Reserve rules requiring banks to hold a minimum percentage of deposits as reserves (cash in vault or on deposit at the Fed). The requirement is currently 0% following the March 2020 emergency reduction. Reserve requirements affect bank lending capacity and the money supply.
Reserve requirements were historically one of the Federal Reserve's three main monetary policy tools (alongside open market operations and the discount rate). By requiring banks to hold a fraction of deposits as reserves, the Fed limited how much money the banking system could create through lending. The reserve ratio determined the theoretical money multiplier: a 10% reserve requirement theoretically allowed $1 of base money to support $10 of deposits. In March 2020, the Federal Reserve reduced reserve requirements to 0% for all depository institutions — eliminating them as an active policy tool. The stated rationale: the banking system already held large excess reserves (post-2008 QE programs had flooded the system with reserves), making the requirement effectively redundant. The Fed transitioned to managing monetary conditions primarily through interest on reserve balances (IORB) — paying banks interest on reserves held at the Fed — as its primary policy tool. With 0% reserve requirements, the theoretical textbook money multiplier no longer constrains bank lending in the simple reserve-ratio model. In practice, bank lending is constrained by: (1) capital requirements (Basel III / Tier 1 / risk-weighted assets) — the more economically binding constraint; (2) liquidity coverage ratio (LCR) requirements — requiring high-quality liquid assets; (3) market funding availability — banks must fund loans by attracting deposits or market borrowing. For SMBs, understanding reserve requirements helps contextualize why some rate changes do not affect lending availability as expected. The binding constraint on bank lending today is capital adequacy (Basel III), not reserves. Source: Federal Reserve at https://www.federalreserve.gov/monetarypolicy/reservereq.htm.
Yes. The Federal Reserve set reserve requirements to 0% effective March 26, 2020. This means banks are not legally required to hold any minimum reserve against their deposits. Banks still hold significant reserves (typically deposited at the Federal Reserve) but do so voluntarily in response to interest on reserve balances (IORB) and liquidity regulations, not because of a statutory reserve ratio.
Capital requirements are the primary binding constraint. Under Basel III / US implementation, banks must maintain Tier 1 capital ratios (common equity / risk-weighted assets) of at least 4.5% minimum and 6%+ to be 'well-capitalized.' Risk-weighted assets grow with each loan made, consuming capital. Liquidity Coverage Ratio (LCR) requirements also constrain certain types of lending. These capital-based constraints are more economically meaningful than the old reserve-ratio model.
Before March 2020: 10% reserve requirement on transaction accounts (checking accounts) above $127.5M; 3% on transaction accounts $16.9M–$127.5M; 0% on savings accounts and time deposits. Most reserve requirements had gradually been reduced or eliminated for non-checking account deposits prior to 2020. The 2020 change eliminated the remaining transaction account requirements.