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Reserve requirements are central bank regulations that set the minimum amount that a commercial bank must hold in liquid assets. This minimum amount, commonly referred to as the commercial bank's reserve, is generally determined by the central bank on the basis of a specified proportion of deposit liabilities of the bank.
Bank reserves are a commercial bank's cash holdings physically held by the bank, [1] and deposits held in the bank's account with the central bank.Under the fractional-reserve banking system used in most countries, central banks may set minimum reserve requirements that mandate commercial banks under their purview to hold cash or deposits at the central bank equivalent to at least a prescribed ...
Regulation D was known directly to the public for its former provision that limited withdrawals or outgoing transfers from a savings or money market account. No more than six such transactions per statement period could be made from an account by various "convenient" methods, which included checks, debit card payments, and automatic transactions such as automated clearing house transfers or ...
The money multiplier, m, is the inverse of the reserve requirement, R: [26] =. In countries where the central bank does not impose a reserve requirement, such as the United States, Canada and the United Kingdom, the theoretical money multiplier is undefined, having a denominator of zero. [27]
Lowering the reserve requirement frees up funds for banks to buy other profitable assets. However, even though this tool immediately increases liquidity, central banks rarely change the reserve requirement because doing so frequently adds uncertainty to banks' planning. Most modern central banks now have zero formal reserve requirement.
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However, commercial banks may often hold excess reserves, i.e. reserves held in excess of the legal reserve requirements. This is for instance the case in countries that do not impose legal reserve requirements at all like the United States, [6] [7] the United Kingdom, Canada, Australia, New Zealand and the Scandinavian countries.
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