Reserve Requirements: History, Changes, and Current Policy
Reserve requirements — rules mandating that depository institutions hold a specified fraction of certain deposits in reserve — once stood as a primary lever of U.S. monetary policy. This page traces the mechanics of that tool, examines how it was used across different economic regimes, and explains the Federal Reserve's March 2020 decision to reduce reserve requirement ratios to zero percent for all deposit categories. Understanding this history clarifies both how monetary policy has evolved and why alternative tools now dominate the Fed's operational framework.
Definition and scope
A reserve requirement is a regulatory floor specifying the minimum percentage of a bank's reservable liabilities — historically, transaction deposits such as checking accounts — that must be held either as vault cash or as balances on deposit at a Federal Reserve Bank. The legal authority for reserve requirements rests in the Federal Reserve Act of 1913, as subsequently amended. Under 12 U.S.C. § 461, Congress granted the Board of Governors authority to set reserve ratios within statutory limits.
Before March 2020, the Federal Reserve applied reserve requirements only to net transaction accounts (primarily demand deposits), not to savings deposits or time deposits. The ratio applied on a tiered basis: a 0 percent ratio on amounts up to a low reserve tranche, 3 percent on the next tranche, and 10 percent on amounts above the high reserve tranche. The Board of Governors adjusted these tranche thresholds annually based on deposit growth (Federal Reserve Regulation D, 12 CFR Part 204).
The Board of Governors of the Federal Reserve System holds sole authority to set reserve ratios within the statutory bounds Congress established — a dimension of Federal Reserve structure detailed further in the site's overview of Federal Reserve policy tools.
How it works
The operational mechanism of reserve requirements flows through the following sequence:
- Deposit classification: A bank's compliance department classifies all liabilities into reservable and non-reservable categories under Regulation D.
- Computation period: The bank tallies average daily net transaction account balances over a 14-day computation period.
- Reserve maintenance period: The bank must hold sufficient reserves during the corresponding 14-day maintenance period — offset two days from the computation period — to satisfy the required reserve balance.
- Satisfaction methods: Required reserves can be met with vault cash counted during the computation period, or with balances held at the regional Federal Reserve Bank during the maintenance period.
- Deficiency charges: Banks falling short of required reserves historically faced a penalty rate equal to the discount rate plus 2 percentage points, applied to the deficiency amount (Federal Reserve Regulation D, 12 CFR § 204.7).
The textbook transmission mechanism held that higher reserve requirements reduced the deposit multiplier, contracting the money supply; lower requirements expanded it. In practice, the federal funds rate and open market operations proved more precise and predictable instruments, and reserve requirements became largely secondary to rate-targeting frameworks by the late 20th century.
Common scenarios
Pre-2020 tiered compliance: A mid-sized bank holding $150 million in net transaction deposits during a given computation period would have applied the 10 percent ratio to amounts above the applicable high reserve tranche — then set at $127.5 million for reserve maintenance periods beginning January 2020 — while applying lower rates to the first two tiers (Federal Reserve Board, Reserve Requirements).
The 2020 elimination: On March 15, 2020, the Federal Reserve Board announced a reduction of reserve requirement ratios to 0 percent for all deposit categories, effective March 26, 2020. The Board cited the shift to an ample-reserves operating framework — one in which the federal funds rate is controlled through the interest rate paid on reserve balances rather than through reserve scarcity (Federal Reserve Press Release, March 15, 2020).
Interest on reserves as the replacement anchor: With reserve requirements at zero, the primary tool for floor management became the Interest on Reserve Balances (IORB) rate, which the Fed sets directly. Banks have no incentive to lend overnight at a rate below what they earn by simply holding balances at the Fed, creating a lower bound on the federal funds rate without mandatory reserve minimums.
Contrast — required vs. excess reserves: Before 2008, banks held minimal excess reserves because holding idle balances at the Fed earned nothing. After Congress authorized the Fed to pay interest on reserves in October 2008 under the Emergency Economic Stabilization Act, excess reserve balances rose dramatically — reaching over $2.7 trillion at peak periods (Federal Reserve H.4.1 Statistical Release). This structural shift made mandatory reserve floors operationally redundant.
Decision boundaries
The Federal Reserve's choice to rely on reserve requirements versus interest-rate tools depends on several structural conditions:
| Condition | Reserve Requirement Relevant | Interest Rate Tools Dominant |
|---|---|---|
| Reserve scarcity regime | Yes — small changes in ratios affect bank lending capacity | No — banks already have minimal excess reserves |
| Ample reserves regime | No — floor is non-binding when reserves are abundant | Yes — IORB rate sets the effective floor |
| Rapid credit expansion concern | Potentially — raising ratios immediately restricts deposit multiplication | Less direct — rate increases transmit more slowly |
| International coordination | Constrained — Basel III frameworks (BIS Basel III Standards) emphasize capital ratios, not reserve ratios | Compatible — rate policy operates independently |
The Fed's current ample-reserves framework means reserve requirements are unlikely to return as an active policy instrument under normal conditions. Any reinstatement would require both an operational rationale and a return to reserve-scarcity conditions — a scenario that would represent a fundamental architectural reversal of post-2008 monetary plumbing. For deeper context on how the Fed's broader toolkit fits together, the monetary policy explained and quantitative easing and tightening pages address complementary mechanisms in detail.
The dual mandate — maximum employment and stable prices — remains the governing objective regardless of which specific instrument is active, and instrument selection is always evaluated against those twin statutory obligations.