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Reserve requirements

4 May, 2015 - 10:37

Another instrument of monetary policy adjustment employed by the Federal Reserve System is the fractional reserve requirement, also known as the required reserve ratio 1. The required reserve ratio sets the balance that the Federal Reserve System requires a depository institution to hold in the Federal Reserve Banks 2, which depository institutions trade in the federal funds market discussed above 3. The required reserve ratio is set by the Board of Governors of the Federal Reserve System 4. The reserve requirements have changed over time and some of the history of these changes is published by the Federal Reserve 5.

Reserve Requirements in the U.S. Federal Reserve System6

Liability Type Requirement
Percentage of liabilities Effective date
Net transaction accounts
$0 to $11.5 million 0 12/29/11
More than $11.5 million to $71 million 3 12/29/11
More than $71 million 10 12/29/11
Nonpersonal time deposits 0 12/27/90
Eurocurrency liabilities 0 12/27/90

As a response to the financial crisis of 2008, the Federal Reserve now makes interest payments on depository institutions' required and excess reserve balances. The payment of interest on excess reserves gives the central bank greater opportunity to address credit market conditions while maintaining the federal funds rate close to the target rate set by the FOMC 7.