Changing reserve requirements affects bank lending by changing how much of each deposit a bank must hold back rather than lend out. Lower the ratio and banks can lend more of every dollar that walks in the door, and that new lending cascades through the banking system as the loaned funds get redeposited and lent again. Raise the ratio and the process runs in reverse: banks have to pull money back into reserves, which usually means slower new lending, called loans, or asset sales. In practice, though, this lever is currently idle. The Federal Reserve Board reduced every reserve requirement ratio to zero percent effective March 26, 2020, and has not restored them.1Board of Governors of the Federal Reserve System. Reserve Requirements
What a Reserve Requirement Is
A reserve requirement is the minimum share of a bank’s deposits it must keep on hand rather than put to work as loans. Banks satisfied the requirement by holding physical cash in the vault or a balance at a regional Federal Reserve Bank, and an institution short on vault cash could meet the obligation through a pass-through arrangement with another bank that held a Fed account.1Board of Governors of the Federal Reserve System. Reserve Requirements
The dollar amount a bank had to hold came from applying the reserve ratio to its reservable liabilities, mainly checking and other transaction accounts. Section 19 of the Federal Reserve Act, codified at 12 U.S.C. ยง 461, sets the outer boundaries: for transaction balances above a low reserve tranche, the Board can pick any ratio from zero to 14 percent, and for balances inside the tranche, the ceiling is 3 percent and the ratio may also be zero.2Federal Register. Reserve Requirements of Depository Institutions Regulation D (12 CFR Part 204) is where the Board sets the ratios and defines which liabilities count.3eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions
How a Lower Ratio Expands Lending
When the Fed cuts the reserve ratio, money that was locked up as required reserves becomes available for new loans. A bank sitting on exactly the minimum finds itself with excess reserves it can put to work. Across every bank in the system, even a small cut frees billions of dollars in potential new lending.
The effect compounds. If the ratio were 10 percent, a bank taking in a $100 deposit would set aside $10 and could lend the remaining $90. Once that $90 is deposited at another bank, it generates another $81 in lendable funds, and so on down the chain. This cascade is the money multiplier, and it is why reserve requirements had outsized influence over the total volume of credit in the economy. Cut the ratio, and the multiplier expands. More lending, more spending, more money moving through the system.
How a Higher Ratio Contracts Lending
Raising the ratio works in reverse. Banks that were fully lent out have to pull funds back into reserves, either by calling in loans, selling assets, or simply halting new lending until deposits catch up. The multiplier shrinks. Fewer loans get made per dollar of deposits, which cools spending and puts downward pressure on prices.
This is a blunt instrument. An interest rate change nudges behavior gradually, but a reserve requirement hike forces an immediate balance sheet adjustment across the entire banking system. A single percentage-point move in the ratio could shift tens of billions of dollars overnight. That bluntness is one reason the Fed rarely touched the ratio in modern practice.
Why the Fed Stopped Using This Tool
Open market operations and interest rate targeting offered much finer control than reserve requirement changes ever did, and they gradually displaced reserve requirements as the Fed’s preferred instruments well before 2020. The formal end came during the pandemic. On March 15, 2020, the Board announced it was reducing reserve requirement ratios to zero percent for all depository institutions, effective March 26, 2020, with the amendments to Regulation D taking effect on March 24.4Federal Register. Regulation D: Reserve Requirements of Depository Institutions
This was not a temporary emergency measure that quietly lapsed. Every reserve ratio in Regulation D remains at zero percent as of 2026, and the Board has given no indication it plans to reimpose requirements.3eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions The statute still authorizes ratios up to 14 percent, and Regulation D still contains the formulas. But the active ratios applied to every liability category are zero. For anyone asking today how a ratio change would affect lending, the honest answer starts with a caveat: the Fed no longer changes ratios.
How the Fed Steers Lending and Rates Now
With reserve requirements gone, the Fed relies on an ample-reserves framework that it formally adopted in January 2019. The Federal Open Market Committee described the approach as one in which “an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates, and in which active management of the supply of reserves is not required.”5Board of Governors of the Federal Reserve System. Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization
The primary tool is the Interest Rate on Reserve Balances, or IORB. The Fed pays this rate on every dollar a bank parks in its reserve account, and as of December 2025 it stood at 3.65 percent.6Board of Governors of the Federal Reserve System. Interest on Reserve Balances The rate acts as a soft floor for overnight lending. If a bank can earn 3.65 percent risk-free at the Fed, it has little reason to lend those funds to another bank for less. When market rates dip below the IORB, banks borrow cheaply and redeposit at the Fed to capture the spread, which pulls the market rate back up.
The floor leaks slightly because some institutions with Fed accounts, such as the Federal Home Loan Banks, do not earn interest on their balances and will lend below the IORB. To catch that leakage, the Fed runs the Overnight Reverse Repurchase Agreement facility, offered to a broader set of counterparties, which currently pays 3.50 percent.7Federal Reserve Bank of New York. Reverse Repo Operations Together, these administered rates keep the federal funds rate within the FOMC’s target range, which stood at 3.50 to 3.75 percent as of the March 2026 meeting.8Board of Governors of the Federal Reserve System. Federal Reserve Issues FOMC Statement Bank lending decisions still respond to the cost of funds, but the Fed influences that cost by adjusting what it pays on reserves, not by forcing banks to hold more or fewer of them.
Why Banks Still Hold Reserves
Zero reserve requirements did not empty bank accounts at the Fed. Banks hold reserves voluntarily, and the IORB is a big part of the reason. At 3.65 percent on a risk-free, perfectly liquid asset, reserve balances are genuinely attractive against many alternatives.6Board of Governors of the Federal Reserve System. Interest on Reserve Balances Banks also need reserves to settle payments, manage intraday liquidity, and satisfy internal risk models. The Fed itself needs banks to hold ample reserves; if reserves became scarce, the administered-rate framework would break down and the Fed would have to return to active daily intervention in money markets.
What Changed for Depositors: Savings Transfer Limits
One side effect of the zero-percent move that everyday customers noticed was the end of Regulation D’s six-transfer limit on savings accounts. Before April 2020, federal rules capped certain withdrawals and transfers from savings and money market accounts at six per monthly statement cycle. That limit was tied to the regulatory definition of “savings deposits” under Regulation D, and when the Fed overhauled the regulation, the six-transfer restriction came out at the federal level.
The change is permanent, not a pandemic suspension that could snap back. Individual banks can still set their own withdrawal limits as internal policy, though, and many kept the old six-transfer cap in place after the federal rule disappeared. If your bank still enforces a limit on savings transfers, that is a bank policy choice rather than a federal requirement.