Reserve requirements are Federal Reserve rules that set the minimum share of customer deposits a bank must keep as cash in its vault or as a balance at a Federal Reserve Bank, rather than lending out. Since March 26, 2020, that share has been zero percent for every depository institution in the United States, and it remains zero in 2026.1Federal Reserve Board. Reserve Requirements The legal machinery still exists, though, and the Fed can turn it back on. Understanding how the rule works, why it went to zero, and what replaced it explains a lot about how modern monetary policy actually operates.
What Reserve Requirements Actually Do
Banks run on fractional reserve banking. When you deposit money into a checking account, the bank owes you that money on demand, but it doesn’t leave the full amount sitting idle. It lends most of it out and earns interest. Reserve requirements historically set the floor on how much of each deposit had to stay behind as immediately available cash.
That floor did two jobs. First, it acted as a throttle on the money supply. A lower ratio let banks lend more, pushing additional money into circulation. A higher ratio pulled credit back and slowed things down. By turning the dial, the Fed could speed up or cool off the economy without touching individual transactions. Second, it gave every bank a guaranteed liquidity buffer against everyday withdrawals. Reserve rules were never the only defense against a bank run, and today they are not even the main one, but the buffer was real.
Why the Ratio Is Zero
The Federal Reserve Board announced on March 15, 2020 that it would cut the reserve requirement to zero percent for all depository institutions, effective March 26. The stated goal was to free up liquidity so banks could lend more aggressively during the pandemic shock.2Federal Reserve. Federal Reserve Actions to Support the Flow of Credit to Households and Businesses In early 2021 the Fed made the change permanent by final rule.
The pandemic was only the trigger. The deeper reason is that reserve requirements had already been drained of most of their function. Before the 2007–2009 financial crisis the Fed operated in a “scarce reserves” framework, adjusting the day-to-day supply of reserves through open market operations to hit its interest rate target. After the crisis, large-scale asset purchases flooded the banking system with reserves and that method stopped working. The Fed moved to an “ample reserves” regime, where it sets interest rates by administering rates directly rather than by managing reserve scarcity.3Federal Reserve. Implementing Monetary Policy in an Ample-Reserves Regime In that world, a mandated minimum reserve level added nothing.
Regulation D is still on the books. The Board can raise the ratio at any time if it decides the money supply needs tightening through this channel.4Federal Register. Regulation D: Reserve Requirements of Depository Institutions As of mid-2026, it has given no public signal that it plans to.
The Fed’s Authority and Its Limits
The Board of Governors gets its power to set reserve requirements from the Federal Reserve Act, codified at 12 U.S.C. § 461. The statute reaches every depository institution, not just Fed member banks, and lets the Board define what counts as a deposit and which accounts are subject to reserves.5Office of the Law Revision Counsel. 12 USC 461 – Reserve Requirements
Congress capped how high the Board can go. For the first portion of a bank’s transaction accounts, up to an annually adjusted threshold, the ratio cannot exceed 3 percent. For amounts above that threshold, the Board can set anything from zero to 14 percent. On top of those numbers, the Board can add a supplemental reserve requirement of up to 4 percent on all transaction accounts, but only with an affirmative vote of at least five Board members.5Office of the Law Revision Counsel. 12 USC 461 – Reserve Requirements Those caps are what would constrain any future tightening.
How the Calculation Works When the Ratio Is Not Zero
Reserve obligations are calculated against a bank’s net transaction accounts, which include checking accounts, NOW accounts, and similar payment accounts.6Cornell Law School. 12 USC 461 – Adjustments to Reserves The system uses a tiered structure with dollar thresholds that adjust every January based on growth in total transaction deposits across the banking system. The Fed still publishes the updated numbers each year even though every tier is currently set at zero, which shows the infrastructure is being maintained for possible future use.
For 2026, the tiers are as follows:1Federal Reserve Board. Reserve Requirements
- The first $39.2 million in net transaction accounts is exempt from any reserve obligation.
- Deposits between $39.2 million and $674.1 million (the low reserve tranche) historically carried a lower ratio, capped at 3 percent by statute. Currently zero.
- Deposits above $674.1 million historically carried the standard ratio, capped at 14 percent by statute. Also currently zero.
Banks do not compute reserves from a single day’s snapshot. They average deposits over a defined computation period and then maintain the required balance across a corresponding 14-day maintenance period. Weekly reporters begin their maintenance period on the third Thursday after the computation period ends. Quarterly reporters maintain reserves over six or seven consecutive 14-day cycles.7eCFR. 12 CFR 204.5 – Maintenance of Required Reserves Averaging keeps a one-day spike in deposits from distorting the obligation.
What Counts as a Reserve
When the ratio is active, only two kinds of assets satisfy it:
- Vault cash, meaning physical currency and coin held on the bank’s premises and immediately available for withdrawal.
- Balances in the bank’s account at a Federal Reserve Bank.
Loans, mortgages, bonds, and corporate securities do not count, no matter how valuable. The definition is deliberately narrow because the whole point of a reserve is that it can be paid out instantly.
Smaller banks that do not maintain their own Fed account can meet the requirement through a pass-through arrangement with a correspondent bank. The correspondent holds the smaller bank’s required balance inside its own Fed account and must keep a total balance large enough to cover both its own requirement and every respondent’s.8Federal Register. Reserve Requirements of Depository Institutions The Fed pays interest on those pass-through balances directly to the correspondent, which may (but need not) pass it back to the respondent. If a shortfall happens, the Fed charges the correspondent and lets the two banks settle it between themselves.
How the Fed Sets Rates Without Reserve Requirements
With the ratio at zero, the Fed steers monetary policy mainly through the interest rate on reserve balances, or IORB. As of May 2026, the IORB rate is 3.65 percent, paid on every balance eligible institutions hold in their master accounts at Federal Reserve Banks.9Federal Reserve Economic Data (FRED). Interest Rate on Reserve Balances (IORB Rate)
The logic is simple. No bank will lend to another bank overnight for less than what the Fed is already paying it to leave the money on deposit. That sets a floor under short-term rates. The Fed pairs IORB with overnight reverse repurchase (ON RRP) operations, which extend a similar floor to money market participants that do not have Fed accounts, such as money market funds. Together, the two rates keep the federal funds rate inside the range the Federal Open Market Committee targets.10Federal Reserve Board. Interest on Reserve Balances (IORB) Frequently Asked Questions The reserve requirement dial is not being used because this pair of administered rates does the same work more precisely.
What the Change Meant for Savings Accounts
One consumer-facing shift arrived alongside the zero percent ratio. In April 2020 the Fed deleted the longstanding Regulation D rule that limited savings accounts to six “convenient” withdrawals or transfers per month, and it has not signaled any plan to bring the cap back.11eCFR. 12 CFR 204.133 – Multiple Savings Deposits Treated as a Transaction Account
The federal cap is gone, but your bank can still set its own. Many traditional banks continue to cap convenient transfers at six per month and charge excess transaction fees, often $5 to $15 per extra transfer, or may convert or close accounts for repeated overages. Online banks and credit unions are more likely to have dropped the limit entirely. Check your account agreement before assuming you have unlimited transfers.
What Zero Reserve Requirements Did Not Change
The most common misreading of the zero percent ratio is that banks are no longer required to hold any financial cushion. That is wrong. Reserve requirements and capital requirements are separate regimes, and capital requirements are still in force.
Reserve rules govern how much cash or Fed-account balance a bank holds against deposits, which is a liquidity question. Capital rules govern how much of a bank’s funding comes from shareholders’ equity rather than borrowed money, which is a solvency question. Under the Basel III framework, large banks must still maintain minimum ratios of high-quality capital relative to their risk-weighted assets. Those ratios have not been zeroed, and they do far more work to prevent bank failures than reserve requirements ever did.
FDIC deposit insurance is also unchanged. Deposits remain insured up to $250,000 per depositor, per institution, per ownership category, no matter how much cash the bank keeps on hand. The move to zero changed how the Fed implements monetary policy. It did not weaken the protections that sit around your individual account.