Reserve requirements are the minimum portion of customer deposits that a bank must hold in cash or at the Federal Reserve rather than lend or invest. Since March 26, 2020, the Federal Reserve has set every reserve requirement ratio at zero percent, so banks are not currently obligated to hold a specific amount for this purpose.1Federal Reserve. Federal Reserve Actions to Support the Flow of Credit to Households and Businesses The rules themselves are still on the books, and the Board of Governors can raise ratios again if it chooses. Everything below explains how the system is designed to work, what it applies to, and what has taken its place as the Fed’s day-to-day tool for steering interest rates.
The Basic Idea Behind a Reserve Requirement
Banks don’t keep every dollar you deposit sitting in a vault. They lend most of it out and earn interest on those loans, holding back only a fraction to meet withdrawals. That structure is called fractional reserve banking, and reserve requirements set the floor for the fraction.
The point is liquidity. If a wave of customers wants cash on the same day, a bank needs enough on hand to pay them without failing. For most of the twentieth century, the Federal Reserve also used the ratio as a lever on the money supply: raising it tightened credit by pulling lendable dollars off the market, lowering it did the opposite. That role has since been handed off to other tools, but the underlying regulation still governs how a required reserve would be calculated if ratios ever rose above zero.
Which Accounts Reserve Requirements Cover
The rules apply to what Regulation D calls “net transaction accounts,” which in practical terms means checking accounts and other deposits a customer can draw on demand.2eCFR. 12 CFR 204.4 – Computation of Required Reserves Savings accounts, certificates of deposit, and other time deposits are generally not reservable. Nonpersonal time deposits and Eurocurrency liabilities are covered by the framework but also carry a zero percent ratio.
One boundary worth naming, because it often causes confusion: in April 2020 the Federal Reserve deleted the old six-transfer-per-month cap on savings accounts that had long lived inside Regulation D. That cap was the dividing line between reservable transaction accounts and non-reservable savings deposits, and with all ratios at zero it no longer served any regulatory purpose.3Federal Reserve Board. Federal Reserve Board Announces Interim Final Rule to Delete the Six-Per-Month Limit on Convenient Transfers From the Savings Deposit Definition in Regulation D Individual banks may still limit savings transfers on their own, but there is no federal cap.
How the Required Amount Is Calculated
When a ratio is above zero, a bank works out its obligation over two overlapping windows defined in Regulation D. The computation period is when the bank averages its daily deposit balances. Weekly filers use a 14-day period ending on a Monday; quarterly filers use a 7-day period beginning the third Tuesday of March, June, September, and December.2eCFR. 12 CFR 204.4 – Computation of Required Reserves
The maintenance period follows after a short lag. That is when the bank has to actually hold, on average, the reserve amount produced by the computation. Fall short and the Fed can charge a penalty at one percentage point above the primary credit rate, applied to the daily average shortfall.4eCFR. 12 CFR 204.6 – Charges for Deficiencies Repeated deficiencies can lead to formal enforcement.
What Counts as a Reserve
Only two things satisfy a reserve requirement. The first is vault cash: physical currency and coin the bank owns, books as an asset, and keeps at locations where depositors have access to it, including its own ATMs.5eCFR. 12 CFR 204.2 – Definitions The second is a balance held at a regional Federal Reserve Bank. That balance is the electronic counterpart of vault cash and moves between institutions to clear checks and settle payments. If vault cash alone doesn’t cover the requirement, the rest has to sit at the Fed.
Treasury bonds, municipal debt, corporate paper, and other investments do not count, no matter how safe or liquid. Reserves have to be instantly available with no price risk, and even a Treasury bond has to be sold before it becomes spendable cash.
The Statute and Regulation D
Reserve requirements come from Section 19 of the Federal Reserve Act of 1913, now codified at 12 U.S.C. § 461. The statute lets the Board of Governors set ratios within limits Congress drew: up to 3 percent on a first tier of transaction accounts and up to 14 percent on amounts above that tier. In extraordinary conditions, at least five Board members can push ratios outside those bounds for up to 180 days at a time after consulting with Congress.6Office of the Law Revision Counsel. 12 USC 461 – Reserve Requirements
The Board carries out that authority through Regulation D at 12 CFR Part 204, which defines the reservable accounts, the computation and maintenance mechanics, what qualifies as vault cash and reserve balances, and the penalties for shortfalls.7eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions (Regulation D) Regulation D also fixes two dollar thresholds that the Board reindexes each year using data from the FR 2900 deposit report: the reserve requirement exemption amount and the low reserve tranche. Those thresholds determine where each ratio tier would begin if the tiers were carrying nonzero rates.
Before 2020, the tiers worked like this: nothing owed below the exemption amount, 3 percent between the exemption and the tranche, and 10 percent on anything above the tranche.8Federal Register. Regulation D: Reserve Requirements of Depository Institutions Smaller banks paid less, in absolute dollars and as a share of deposits, and the biggest banks carried most of the required reserves.
Why the Ratio Is Zero Now
On March 15, 2020, the Board reduced all reserve ratios to zero percent effective March 26, citing support for the flow of credit during the early COVID-19 disruptions.1Federal Reserve. Federal Reserve Actions to Support the Flow of Credit to Households and Businesses The pandemic sped up a shift that had already been under way. In January 2019, the Federal Open Market Committee had announced it would run monetary policy in an “ample reserves” regime, in which the required-reserve mechanism no longer had a meaningful role.
Under the older framework, the Fed managed a scarce supply of reserves to move interest rates because reserve requirements created predictable demand for those reserves. In an ample-reserves system, the supply is large enough that small changes don’t move rates on their own. The Fed steers rates instead by adjusting the interest it pays on reserve balances.9Federal Reserve. Implementing Monetary Policy in an Ample-Reserves Regime – The Basics Dropping the ratios to zero simply formalized how little the older tool was doing.
Interest on Reserve Balances: The Working Tool
With reserve requirements set aside, Interest on Reserve Balances (IORB) is the Federal Reserve’s main lever on short-term rates. The Fed pays banks a specified interest rate on the balances they keep at Federal Reserve Banks, and that rate puts a floor under the federal funds rate. No bank will lend reserves overnight to another bank at a lower rate than the risk-free rate the Fed is already paying.10Federal Reserve Board. Interest on Reserve Balances (IORB) Frequently Asked Questions When the FOMC changes its target range, it typically moves the IORB rate with it.
IORB is also what makes a zero-percent reserve requirement stable. It gives banks a reason to hold reserves voluntarily; without it, demand for reserves would fall away, the fed funds rate would drop sharply, and the Fed would lose control of its main policy rate. A broad set of depository institutions is eligible, including commercial banks, savings institutions, credit unions, and U.S. branches of foreign banks.7eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions (Regulation D)
Liquidity Rules That Still Bind Large Banks
Reserve requirements aren’t the only liquidity rule in U.S. banking, and their move to zero didn’t leave large banks unconstrained. Two Basel III–derived standards, adopted by the Federal Reserve, OCC, and FDIC, do most of the work now.
The Liquidity Coverage Ratio requires covered institutions to hold enough high-quality liquid assets to cover 30 days of severe cash outflows, at a minimum ratio of 100 percent. It applies to banking organizations with $250 billion or more in total assets or $10 billion or more in on-balance-sheet foreign exposure, and their large depository subsidiaries.11Federal Register. Liquidity Coverage Ratio: Liquidity Risk Measurement Standards The Net Stable Funding Ratio looks out a year rather than 30 days, requiring available stable funding to at least equal required stable funding across the same categories of institutions. Its final rule took effect July 1, 2021.12Federal Register. Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements These rules weigh assets by risk and maturity, so they shape large-bank behavior more tightly than a flat percentage on deposits ever did.
Reporting Continues Even at Zero
Depository institutions above a Board-set deposit threshold still file the FR 2900 Report of Deposits and Vault Cash on a weekly basis, using daily figures for each Tuesday-through-Monday reporting week.13Federal Reserve. FR 2900 (Branches and Agencies) Report of Deposits and Vault Cash Quarterly filing was eliminated in January 2021, so covered institutions now file weekly across the board. The data feeds the U.S. monetary aggregates M1 and M2 and the annual reindexing of the exemption amount and the low reserve tranche. If the Board ever restores positive ratios, the reporting plumbing is already there to calculate what each bank owes.