Reserve Requirement

Reserve requirement means the minimum amount of reserves banks are required to hold against deposits. In simple terms, it is the rule for how much money banks must keep available instead of lending out. Reserve requirements are important because they can influence bank lending, liquidity, and money creation. Higher requirements can limit lending, while lower requirements can make more funds available. For example, if a bank has $1 billion in deposits and a 10% reserve requirement, it must hold $100 million in required reserves. Reserve requirement is not the only limit on bank lending. Capital rules, credit risk, funding costs, and borrower demand also matter.