The reserve requirement ratio is the percentage of customer deposits that a bank is required to hold back rather than lend out, kept either as vault cash or as a balance at the central bank. In the United States, the Federal Reserve set this ratio to zero percent effective March 26, 2020, and it remains at zero as of 2026. The tool itself is far from obsolete, though: China and other large economies still adjust their ratios regularly to steer credit and growth.
What the Ratio Actually Requires of a Bank
The rule tells a bank what fraction of its deposits must stay locked up and unavailable for lending. At a 10 percent ratio, a bank with $1 million in covered deposits must hold $100,000 in reserve and can lend out the remaining $900,000. The reserve itself sits either as cash in the bank’s vault or as a balance on deposit at a Federal Reserve Bank.
Not every type of deposit counts. Under U.S. law, the Federal Reserve Board can impose reserve requirements on three categories of bank liabilities: transaction accounts (checking accounts and NOW accounts), nonpersonal time deposits, and Eurocurrency liabilities. Savings accounts and personal time deposits like individual CDs are not subject to reserve requirements.1eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions A transaction account is any deposit from which the holder can make payments to third parties, which captures checking accounts, credit union share drafts, and NOW accounts.2Federal Reserve. Reserve Requirements of Depository Institutions – A Small Entity Compliance Guide
The authority sits in Section 19 of the Federal Reserve Act, codified at 12 U.S.C. § 461. The statute lets the Board set a ratio of up to 3 percent on the first portion of transaction accounts (a dollar threshold that adjusts for inflation each year) and up to 14 percent on amounts above that threshold. The same statute also permits the Board to set both ratios at zero.3Office of the Law Revision Counsel. 12 USC 461 – Reserve Requirements That last provision is why the current zero ratio is lawful.
The U.S. Ratio Is Currently Zero
On March 15, 2020, as the COVID-19 pandemic disrupted financial markets, the Federal Reserve Board eliminated all reserve requirements by reducing every ratio to zero percent, effective March 26, 2020.4Federal Reserve. Federal Reserve Actions to Support the Flow of Credit to Households and Businesses As of 2026, all three categories under Regulation D — transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities — remain at zero.1eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions
Before that change, the Fed ran a tiered system based on the size of a bank’s deposit base:5Federal Reserve. Federal Reserve Board – Reserve Requirements
- The first slice of net transaction accounts, up to $16.9 million as of January 2020, carried no reserve requirement.
- Deposits above that exemption and up to $127.5 million were subject to a 3 percent ratio.
- Deposits above $127.5 million required a 10 percent reserve.
Those thresholds were reset each year based on growth in total transaction accounts across the banking system. A small community bank with $15 million in checking deposits owed nothing. A large bank with $500 million in transaction deposits had to immobilize roughly $14.8 million.
The Board tied the shift to zero to its move toward an “ample reserves regime,” in which controlling short-term interest rates no longer depends on managing the quantity of reserves banks hold. The reporting plumbing stayed in place, but the ratio itself stopped doing work.
What Replaced It in U.S. Monetary Policy
With the ratio at zero, the Federal Reserve now steers monetary policy through administered interest rates rather than by controlling how much banks must hold back. The main tool is the Interest on Reserve Balances (IORB) rate, which the Board sets and pays on all balances that eligible institutions keep at Federal Reserve Banks. As of March 2026, the IORB rate is 3.65 percent.6Federal Reserve Bank of St. Louis. Interest Rate on Reserve Balances (IORB Rate)
That rate sets a floor under short-term interest rates in the economy. A bank will not lend overnight funds to another bank for less than it can earn risk-free from the Fed, so the IORB rate anchors the federal funds rate, which in turn ripples into mortgage rates, auto loans, business credit lines, and credit card APRs. The effective federal funds rate as of February 2026 is 3.64 percent, sitting just under the IORB rate as expected.7Federal Reserve Bank of St. Louis. Federal Funds Effective Rate The overnight reverse repo facility extends a similar rate to non-bank participants like money market funds, which reinforces the floor.8Federal Reserve. Interest on Reserve Balances (IORB) Frequently Asked Questions
The Federal Open Market Committee has described the approach as one where “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.”9Federal Reserve. Implementing Monetary Policy in an Ample-Reserves Regime – The Basics The old framework forced banks to compete for scarce reserves, which gave the Fed leverage. The new one floods the market with reserves and anchors everything through the rate the Fed pays on them.
How the Ratio Multiplies Money
The textbook reason the ratio matters so much is the money multiplier. When a bank receives a $1,000 deposit and must hold 10 percent in reserve, it lends out $900. That $900 ends up deposited at another bank, which holds $90 and lends out $810. The cycle repeats across the system. The theoretical maximum expansion of money from a single deposit is 1 divided by the reserve ratio. At 10 percent, the multiplier is 10, meaning $1,000 in initial deposits can support up to $10,000 in total deposits across the banking system.
Lowering the ratio raises the multiplier. At 5 percent it doubles to 20. Raising the ratio shrinks it: at 20 percent, each dollar of deposits can only support $5 across the system. That is the mechanical channel through which central banks historically expanded or contracted the money supply. One adjustment reached every bank at once.
Reality has always been messier than the formula suggests. Banks hold excess reserves for safety, and borrower demand fluctuates. With U.S. requirements at zero, the theoretical multiplier is infinite, which obviously does not describe real conditions. What actually constrains U.S. lending today is a mix of capital rules, liquidity regulations, risk appetite, and borrower creditworthiness rather than any binding reserve floor. The multiplier concept still describes how the mechanism works in countries that keep the ratio active.
Where the Ratio Is Still an Active Tool
Many countries, particularly large emerging economies, still use the reserve requirement ratio as a front-line policy lever. China is the clearest example. The People’s Bank of China is authorized under Chinese law to require banking institutions to place deposit reserves at a prescribed ratio as one of its core monetary policy instruments.10Bank for International Settlements. China As of April 2026, China’s ratio stands at approximately 6.2 percent, after the PBOC announced a 0.5 percentage point cut effective May 15, 2025, aimed at reducing bank funding costs and supporting lending.11Gov.cn. China to Cut Reserve Requirement Ratio by 0.5 Percentage Points from May 15
Why the ratio instead of a rate change? In economies where interbank markets are less developed or where the central bank wants to inject large volumes of liquidity quickly, a broad ratio cut does the job more directly than fine-tuning an overnight rate. When China cuts its ratio, Chinese banks suddenly hold billions in additional lendable funds, which pushes domestic borrowing costs down and stimulates credit growth. The effect is blunter than a rate adjustment because it hits every bank simultaneously, regardless of local conditions. Brazil, India, and Turkey also adjust reserve requirements as part of their monetary policy toolkit, though the specific structures vary.
The bluntness is also why most advanced economies have drifted away from the tool. A single ratio change tightens or loosens conditions everywhere at once, and reversing it is operationally disruptive because banks have to suddenly shift large sums into or out of reserve balances.
How It Differs From Capital Requirements
Reserve requirements and capital requirements are often confused. They sound similar and both constrain what a bank can do with its money, but they guard against different risks.
Reserve requirements, when active, force a bank to keep a percentage of its deposits in liquid form, cash or central bank balances, so depositors can withdraw funds on demand. The concern is short-term liquidity.
Capital requirements force a bank to fund a percentage of its assets with shareholders’ equity rather than borrowed money. Under the Basel III framework, banks must maintain a minimum Tier 1 capital ratio of 6 percent, plus a 2.5 percent capital conservation buffer. The concern there is solvency: the bank’s ability to absorb loan losses without becoming insolvent. Capital requirements remain fully in force in the U.S. and are arguably the binding constraint on bank lending in the current zero-reserve environment.
The Reporting Framework Still in Place
Even at a zero ratio, the Federal Reserve’s reporting infrastructure continues to run. Depository institutions report deposit balances and vault cash on the FR 2900 form, collected weekly. That data feeds the U.S. monetary aggregates and is used to index the reserve requirement exemption and low reserve tranche amounts annually, which keeps the framework ready if the Board ever decides to reactivate requirements.12Federal Reserve Board. FR 2900 (Savings and Loans)
Compliance operates on a 14-day maintenance period that runs from a Thursday through the second Wednesday. The Fed calculates each institution’s requirement and communicates it before the period begins. Banks satisfy the obligation through vault cash first, with any remainder held as a balance at a Federal Reserve Bank.13Federal Reserve. Calculation of Reserve Balance Requirements For a reader trying to understand the mechanics, the main point is that the pipes stayed connected after the valve was closed. The ratio could be raised above zero through a Board action without rebuilding the system from scratch.