
Reserve requirements are a key aspect of banking regulation, and understanding how they work is crucial for anyone interested in the financial sector.
The central bank sets the reserve requirement, which is the percentage of deposits that banks must hold in reserve rather than lending out. This requirement typically ranges from 5% to 15%.
Banks are required to maintain a minimum reserve ratio, and failing to meet this requirement can result in penalties. For example, if a bank's reserve requirement is 10%, it must hold $10 in reserves for every $100 in deposits.
Banks use reserve requirements to manage their liquidity and meet their financial obligations.
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Authority and Purpose
The Federal Reserve System issues reserve requirements under the authority of section 19 of the Federal Reserve Act and other provisions.
This part of the regulation, specifically section 204.1, aims to facilitate the implementation of monetary policy by the Federal Reserve System.
The regulation applies to various types of depository institutions, including insured banks, credit unions, and institutions insured under the National Housing Act.
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Insured banks, as defined in section 3 of the Federal Deposit Insurance Act, are required to maintain reserves in accordance with this part, as are insured credit unions and institutions insured under the National Housing Act.
A foreign bank's branch or agency located in the United States must comply with the provisions of this part if its parent foreign bank has total worldwide consolidated bank assets in excess of $1 billion, or if it is controlled by a foreign company or group of companies that own or control foreign banks with total worldwide consolidated bank assets in excess of $1 billion.
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Title 12
Title 12 is a crucial part of the Federal Reserve System's framework.
It's focused on banks and banking, which is why you'll find it under Chapter II. This chapter is dedicated to the Federal Reserve System, and Title 12 is a key component of it.
The Board of Governors of the Federal Reserve System is responsible for overseeing the Federal Reserve System, and Title 12 falls under their jurisdiction.
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Here's a breakdown of the structure of Title 12:
- Title 12 — Banks and Banking
- Chapter II — Federal Reserve System
- Subchapter A — Board of Governors of the Federal Reserve System
- Part 204
A key aspect of Title 12 is that it defines certain types of members, including those that are defined in section 2 of the Federal Home Loan Bank Act (12 U.S.C. 1422(4)).
Authority and Purpose
This part is issued under the authority of section 19 (12 U.S.C. 461et seq.) and other provisions of the Federal Reserve Act and of section 7 of the International Banking Act of 1978 (12 U.S.C. 3105).
The purpose of this part is to facilitate the implementation of monetary policy by the Federal Reserve System through reserve requirements imposed on depository institutions.
The authority to issue this part comes from specific sections of the Federal Reserve Act and the International Banking Act of 1978, which provide the framework for monetary policy implementation.
The Federal Reserve System uses reserve requirements to regulate the money supply and implement monetary policy, which affects the overall economy.
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This part relates to reserve requirements imposed on depository institutions, such as insured banks, insured credit unions, and insured institutions, to facilitate the implementation of monetary policy.
The Federal Reserve System has the authority to regulate and supervise depository institutions to ensure they comply with reserve requirements and other regulations.
The provisions of this part apply to depository institutions with total worldwide consolidated bank assets in excess of $1 billion, as well as to foreign banks' branches and agencies located in the United States.
Depository institutions with total worldwide consolidated bank assets in excess of $1 billion are required to comply with the provisions of this part in the same manner and to the same extent as if they were a member bank.
The Board has the authority to provide exceptions to the provisions of this part, but such exceptions are not explicitly stated in the article section.
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What Is a?
Authority and Purpose: What Is a Reserve Ratio?

A reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, as opposed to lending out or investing.
Commercial banks are required to hold a specific percentage of their reservable liabilities in reserve, as defined by the Federal Reserve System. This requirement is part of the Board of Governors of the Federal Reserve System's regulation.
The reserve ratio is a key concept in banking, and understanding it is essential for anyone interested in the banking industry. It's a crucial aspect of how commercial banks operate and manage their finances.
The reserve ratio is not a fixed percentage, but rather it can vary depending on the specific circumstances of the bank. The Federal Reserve System sets the reserve ratio requirement, and it's an important tool for maintaining the stability of the financial system.
In the context of the Federal Home Loan Bank Act, a reserve ratio is also relevant when defining a member bank. A member bank is defined as a bank that meets certain criteria, including holding a specific percentage of its liabilities in reserve.
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Here's a summary of the key points:
• A reserve ratio is the portion of reservable liabilities that commercial banks must hold onto.
• The reserve ratio requirement is set by the Federal Reserve System.
• The reserve ratio is a key concept in banking and is essential for understanding how commercial banks operate.
• The reserve ratio can vary depending on the specific circumstances of the bank.
• A member bank, as defined by the Federal Home Loan Bank Act, must meet certain criteria, including holding a specific percentage of its liabilities in reserve.
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Reporting and Computation
Reporting and Computation is a crucial aspect of reserve requirements. You'll need to file a report of deposits either weekly or quarterly, depending on the requirements.
For institutions that file weekly, reserve requirements are computed on the basis of the institution's daily average balances of deposits and Eurocurrency liabilities during a 14-day computation period ending every second Monday. This is specified in section § 204.4(d).
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Institutions that file quarterly have a slightly different computation period, which is the 7-day period that begins on the third Tuesday of March, June, September, and December. This is mentioned in section § 204.4(e).
To calculate the reserve requirement, you'll need to apply the reserve requirement ratios to net transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities. The ratios are outlined in Table 1 to Paragraph (f) of section § 204.4(f).
Here's a breakdown of the reserve requirement ratios:
Keep in mind that term deposits will not satisfy any institution's reserve balance requirement, as stated in section (2) of the Term Deposits subsection.
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Frequently Asked Questions
What are the three types of reserve requirements?
There are three main types of bank reserves: required, excess, and legal. These types of reserves help banks manage their cash flow and meet customer withdrawal demands.
What are examples of required reserves?
Required reserves are the portion of a bank's deposits that must be held in the Federal Reserve, such as $5,000 in the example above. This reserve requirement is typically a percentage of the bank's total deposits.
What are normal reserve requirements?
Typically, reserve requirements are around 10%, but in reality, most central banks don't enforce this strict ratio, instead setting a total reserve ratio that includes both required and non-required reserves
What is the Fed reserve requirement today?
The Federal Reserve's reserve requirement ratio is currently zero percent, eliminating reserve requirements for all depository institutions. This change was implemented on March 26, 2020, as part of a broader response to the COVID-19 pandemic.
Are bank reserve requirements still zero?
Yes, bank reserve requirements have been at zero percent since March 26, 2020. For more information on this policy and its history, visit the Federal Reserve Board's reserve requirements webpage.
Sources
- https://www.ecfr.gov/current/title-12/chapter-II/subchapter-A/part-204
- https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- https://corporatefinanceinstitute.com/resources/wealth-management/bank-reserves/
- https://www.investopedia.com/terms/r/reserveratio.asp
- https://corporatefinanceinstitute.com/resources/economics/reserve-ratio/
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