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Home > QFINANCE Dictionary > Definition of reserve requirement

Definition of

reserve requirement

Banking

ratio of bank’s reserves to deposits the proportion of a bank's deposits that must be kept in reserve.

In the United Kingdom and in certain other European countries, there is no compulsory ratio, although banks will have their own internal measures and targets to be able to repay customer deposits as they forecast they will be required. In the United States, specified percentages of deposits—established by the Federal Reserve Board—must be kept by banks in a non-interest-bearing account at one of the twelve Federal Reserve Banks located throughout the country.

In Europe, the reserve requirement of an institution is calculated by multiplying the reserve ratio for each category of items in the reserve base, set by the European Central Bank, with the amount of those items in the institution's balance sheets. These figures vary according to the institution.

The required reserve ratio in the United States is set by federal law, and depends on the amount of checkable deposits a bank holds. Effective from December 29, 2011, up to $11.5M the required reserve ratio is 0%, from $11.5M to $71M it is 3% and above $71M it is 10%. These breakpoints are reviewed annually in accordance with money supply growth. No reserves are required against certificate of deposit or savings accounts.

The reserve ratio requirement limits a bank's lending to a certain fraction of its demand deposits. The current rule allows a bank to issue loans in an amount equal to 90% of such deposits, holding 10% in reserve. The reserves can be held in any combination of till money and deposit at a Federal Reserve Bank.

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Definitions of ’reserve requirement’ and meaning of ’reserve requirement’ are from the book publication, QFINANCE – The Ultimate Resource, © 2009 Bloomsbury Information Ltd. Find definitions for ’reserve requirement’ and other financial terms with our online QFINANCE Financial Dictionary.

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