A reserve requirement is a rule requiring a bank to hold a minimum amount of eligible reserves against a defined set of liabilities, often particular deposits. It affects the bank’s demand for settlement assets and the cost of funding its balance sheet. For a quant comparing banking systems, the useful inputs are the applicable rule, eligible liability base and compliance convention—not a universal reserve percentage.
Reserves held at a central bank are assets of the commercial bank and liabilities of the central bank. Customer deposits are liabilities of the commercial bank. The two are different layers of money. What counts toward a reserve requirement depends on the jurisdiction: the Fed’s description of its former positive-requirement regime includes eligible vault cash and balances at a Federal Reserve Bank, while the Eurosystem requires deposits in accounts at national central banks. Fed reserve requirements, ECB minimum reserves.
Separate the rule from the amount held
Consider a fictional rule with one reserve ratio, no exemptions or deductions, and no averaging or timing adjustments. All amounts below are millions of currency units. The eligible deposit base is 100 and the required ratio is 10%, expressed as .
Here is the eligible deposit base, rather than every liability on the bank’s balance sheet. Suppose the bank actually holds 12 of reserves that qualify under this rule. Its excess relative to the requirement is
Original fictional example, in millions of currency units. The bar separates the required minimum from the amount held above it; it does not show lending capacity.
The requirement is 10; actual eligible reserves are 12. The 2 above the minimum is not profit, equity capital, or a promise that the bank can safely lend that amount. Payment outflows, other liquidity needs and regulatory constraints still matter. “Excess” here means only above this specified reserve rule.
The same label can describe different regimes
As checked on 28 October 2026, the Fed’s current reserve-requirement page states that its ratios were reduced to 0% effective 26 March 2020, eliminating reserve requirements for depository institutions. A zero requirement does not mean banks hold no reserves or can ignore settlement needs. Australia’s RBA describes Exchange Settlement balances as the balances banks use to settle interbank payments. Fed, RBA settlement-balance explainer.
The ECB describes a 1% ratio on specified euro-area bank liabilities, with exclusions and an allowance detailed in its calculation guidance. Compliance is based on average current-account reserve holdings over a maintenance period. A balance below the required amount on one day therefore does not, by itself, establish a breach of the averaging requirement. Equally, money in an account that does not qualify cannot simply be counted toward it. The fictional calculation above leaves these institutional details out deliberately. ECB explainer, calculation guidance.
For data work, retain the jurisdiction, rule effective date, liability coverage, eligible reserve assets and compliance period. A ratio from one regime cannot be applied to another country’s total deposits without checking those definitions.
Reserve ratios do not determine lending mechanically
A 10% requirement does not imply an automatic tenfold expansion of loans or money. The Bank of England explains that commercial-bank lending creates deposits and rejects the idea that banks simply multiply a given stock of central-bank money into loans. Lending also depends on credit demand, expected returns, funding and risk constraints, alongside monetary policy. Bank of England: Money creation in the modern economy.
Keep three constraints separate:
| Constraint | What it concerns |
|---|---|
| Reserve requirement | Eligible reserve holdings against the liability base specified by the rule |
| Capital requirement | Loss-absorbing financial resources, rather than a stock of settlement cash |
| Liquidity requirement | Capacity to meet cash outflows; for example, the Liquidity Coverage Ratio relates eligible liquid assets to stressed net outflows |
The Bank of England distinguishes banks’ capital constraints from the reserve transfers needed when customers pay other banks. The BIS explains the Liquidity Coverage Ratio, whose eligible assets and cash-flow denominator differ from a deposit-based reserve rule. A bank’s compliance with one constraint does not establish compliance with the others. Bank of England: How is money created?.
Sources
- Federal Reserve: Reserve Requirements — current zero ratios and the former reserve requirement’s liability and asset definitions.
- ECB: Minimum reserves and What are minimum reserve requirements? — national-central-bank accounts and maintenance-period averaging.
- ECB: How to calculate the minimum reserve requirements — coefficients, exclusions, deductions and allowance.
- RBA: How the Reserve Bank Implements Monetary Policy — Exchange Settlement balances and interbank payments.
- Bank of England: Money creation in the modern economy and How is money created? — deposit creation, reserves and lending constraints.
- BIS Financial Stability Institute: Liquidity Coverage Ratio — Executive Summary — liquid assets and stressed cash outflows.