reserve requirements

(FINANCE) the amount of bank reserves that a bank must keep in storage to meet unexpected liabilities.

Banks are not allowed to lend out 100% of the money they receive as deposits; if they did, then depositors would be unable to take money out of the bank. On the other hand, the bank has to lend most of the money out, since it needs the income earned from interest on loans. Throughout the history of the Usonian banking system, the US states or the federal government have had rules about interest rates, reserves, and financial accounting used by banks.

Reserve requirements are necessary to mitigate the risk of bank runs; this was thought to have disappeared thanks to deposit insurance, but Washington Mutual experienced a bank run in 2008 that forced it into receivership.

In the USA, reserves have been set by law for centuries; as a percentage of liabilities, this percentage has declined over the centuries to its current level of 3-10% (as of 1992). In the Eurozone, this rate is 2%; in Japan, it is about 1.5%; and in Commonwealth countries like the UK & Canada, it is voluntary--there are no reserve requirements.

1👍 2👎