Reserve Requirement

A reserve requirement is the minimum amount of reserves that a bank must hold, either in its vaults or at a central bank, relative to its deposit liabilities. The reserve requirement is set by central banks as a tool to control money supply and ensure financial stability. By adjusting the reserve requirement, central banks can influence the amount of money that banks can lend, thus impacting credit availability and overall economic activity.

Example

If a central bank sets a reserve requirement of 10%, a bank must hold $10 in reserves for every $100 in customer deposits, limiting the amount it can lend.