Reserve requirement.

In plain English

A reserve requirement is a rule that a bank keep a set fraction of its deposits as cash or as a balance at the Fed, which limits how much of each deposit it can lend. The Federal Reserve sets the ratio and can change it, including setting it to zero, so the current figure comes from the Federal Reserve rather than from any fixed convention. Historically the requirement was a tool for controlling credit growth, but modern policy leans on the rate paid on reserves instead. Even without a mandated ratio, banks hold reserves to settle payments and meet liquidity rules. Liquidity coverage standards now do much of the work the requirement once did.

01Why it matters

The rule shapes how much lending a given pool of deposits can support, which feeds into how easy it is for households and small businesses to get credit.

02The math, step by step

Say a bank takes in $1,000 of deposits and the ratio is 10 percent. It holds $100 and can lend $900. At a 5 percent ratio it holds $50 and can lend $950. At zero it can lend the full $1,000, subject to its own liquidity and capital limits.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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