Reserve Requirement

Definition

The reserve requirement is the percentage of deposits that banks are required to hold as reserves, which cannot be loaned out. It is set by the central bank to control the amount of money in circulation.

Related terms

Money Multiplier: The money multiplier refers to the amount of money that can be created through the banking system based on changes in the reserve requirement.

Excess Reserves: Excess reserves are any reserves held by banks above and beyond what is required by the reserve requirement.

Fractional Reserve Banking: Fractional reserve banking is a system where banks only hold a fraction of their deposits as reserves and lend out the rest.