Exploring the Reserve Ratio: Its Meaning, Methodology, and Consequences
In the world of banking, one crucial factor that plays a significant role in the economy is the reserve ratio. This ratio, set by the Federal Reserve, determines how much money banks must hold onto as opposed to lending out or investing.
Before the pandemic, the reserve ratio for banks with over $124.2 million in net transaction accounts was 10%. For banks with more than $16.3 million to $124.2 million, the reserve requirement was 3%. However, banks with net transaction accounts of up to $16.3 million or less were exempt from this requirement, as their reserve ratio was 0%.
The Federal Reserve, the central bank of the United States, determines the reserve ratio. This ratio is a key monetary policy tool, with lowering the reserve ratio increasing the money supply and vice versa. The reserve ratio is specified by the Federal Reserve Board's Regulation D.
U.S. commercial banks are required to hold reserves against their total reservable liabilities, which include net transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities. Interestingly, the reserve requirement for nonpersonal time deposits and Eurocurrency liabilities is 0%.
The reserve ratio plays a crucial role in the fractional reserve banking system, affecting the money multiplier and overall credit creation. In this system, the reserve ratio is key to understanding how much credit money banks can make by lending out deposits.
The Board of Governors of the Federal Reserve has the sole authority to change reserve requirements within limits specified by law. In response to economic conditions during the pandemic, the Federal Reserve lowered reserve requirements to 0% on March 26, 2020.
As of January 2024, the reserve requirement for the exemption amount of $36.1 million to $644.1 million remains at 0%. As of Sept. 18, 2025, the IORB rate is 4.15%.
The Federal Reserve began paying interest to banks on their reserves on Oct. 1, 2008. In July 19, 2021, the interest rate on required reserves (IORR) and the interest rate on excess reserves (IOER) were simplified to a new measure called the interest on reserve balances (IORB).
The term "reserve ratio" refers to the portion of reservable liabilities that commercial banks must hold onto. It's a percentage of deposits that banks must hold in cash and not lend.
In the U.S., the Federal Reserve uses the reserve ratio to control the money supply and influence economic conditions, such as inflation. The money multiplier is defined by the 10% reserve requirement. In fractional reserve banking, the reserve ratio is key to understanding how much credit money banks can make by lending out deposits.
Read also:
- Catastrophe at a U.S. Steel facility in Pennsylvania results in the loss of two lives. crucial details unveiled
- Manipulating Sympathy: Exploiting Victimhood for Personal Gain
- Prices remain a concern for the Germans
- Auto Industry Updates: Geotab, C2A, Deloitte, NOVOSENSE, Soracom, and Panasonic in Focus
