The Federal Reserve eliminated reserve requirements for most banks in 2020 and has not brought them back
As of March 2020, the Federal Reserve removed reserve requirements for all depository institutions — banks, credit unions, and savings banks. This means banks no longer have to hold a set percentage of customer deposits in reserve. They can lend out nearly all the money deposited with them, subject only to other capital and liquidity rules.
Before the change, banks had to keep a percentage of deposits on hand or at the Federal Reserve, depending on the size and type of deposit. That requirement no longer exists. The Federal Reserve has stated it does not plan to reinstate reserve requirements, though Congress could change this through legislation.
This shift was meant to free up cash for banks to lend during the pandemic. It remains in effect today and affects how banks manage their money and how much they can lend to borrowers.
Key Takeaways
- The Federal Reserve eliminated reserve requirements for all banks in March 2020 and has not restored them.
- Before 2020, banks had to hold between 3 and 10 percent of certain deposits in reserve, depending on deposit size and account type.
- Banks still must meet capital requirements and liquidity standards set by regulators, even though reserve requirements no longer apply.
- Only Congress can reinstate reserve requirements; the Federal Reserve alone cannot bring them back.
How reserve requirements worked before 2020
Under the old system, the Federal Reserve set different reserve percentages for different types of deposits. Checking accounts and savings accounts held by individuals had one rate. Large deposits held by businesses had another. The percentages ranged from 0 percent on some accounts to 10 percent on transaction deposits above a certain threshold.
Banks had to hold these reserves either as cash in their vaults or as deposits at a Federal Reserve bank. They could not lend this money out or invest it. The purpose was to ensure banks could always meet customer withdrawals and to give regulators a tool to control how much money banks could lend into the economy.
The Federal Reserve adjusted reserve percentages occasionally to influence lending. Lowering the requirement meant banks could lend more; raising it meant they had to lend less. This was one way the central bank managed economic growth and inflation.
Why the Federal Reserve removed the requirement
In March 2020, as the pandemic began, the Federal Reserve cut reserve requirements to zero for all banks. The stated reason was to encourage lending during an economic crisis. Banks that did not have to set money aside could lend more to businesses and individuals who needed cash.
The Federal Reserve also noted that modern banking had changed. Banks now use real-time payment systems and have access to overnight lending markets, so they do not need to hold as much cash on hand to meet sudden withdrawals. Reserve requirements had become less important as a safety tool.
The change was temporary in theory but has remained in place. The Federal Reserve has signaled no intention to bring reserve requirements back, though it has not ruled out doing so in the future.
What banks must do now instead of holding reserves
Banks still face strict rules about how much money they must keep available, even without reserve requirements. The main tool is now capital requirements, which force banks to hold a percentage of their assets as shareholder equity rather than lending it all out. Capital requirements are generally stricter than the old reserve requirements were.
Banks also must meet liquidity coverage ratios, which ensure they can survive a sudden outflow of deposits. They must hold enough high-quality liquid assets — mainly cash and government bonds — to cover 30 days of stressed withdrawals. This serves a similar purpose to reserve requirements but is calculated differently.
Regulators also set leverage ratios, which limit how much a bank can lend relative to its capital. These rules apply to all banks but are stricter for large banks deemed systemically important to the economy.
Whether Congress might restore reserve requirements
The Federal Reserve cannot reinstate reserve requirements on its own. Only Congress has the power to require banks to hold reserves. Some lawmakers have proposed bringing them back as a way to limit bank lending or to give the Federal Reserve more control over the money supply, but no such legislation has passed.
Most economists and banking regulators support keeping reserve requirements at zero, arguing that capital and liquidity rules are more effective and less distortionary. However, this could change if Congress decides to shift banking policy.
How this affects you as a customer
The removal of reserve requirements means banks can lend more of your deposits to other borrowers. This can mean lower interest rates on savings accounts and money market accounts, since banks do not need to hold money in reserve and can lend it out for higher returns.
On the borrowing side, it can mean more credit is available and potentially lower interest rates on loans, though many other factors affect loan rates. The change also means banks have less of a safety buffer, though capital and liquidity rules are meant to compensate.
If you are concerned about bank safety, you can check a bank's capital ratio and liquidity coverage ratio through its quarterly financial reports, which are public. The Federal Deposit Insurance Corporation (FDIC) also insures deposits up to $250,000 per account holder per bank, regardless of reserve requirements.
Frequently Asked Questions
Do banks still have to keep any money in reserve?
Banks do not have to keep a set percentage of deposits in reserve. However, they must meet capital requirements, liquidity coverage ratios, and leverage limits set by regulators. These rules serve similar purposes but work differently than the old reserve requirement system.
Could the reserve requirement come back?
Only Congress can reinstate reserve requirements. The Federal Reserve has stated it does not plan to do so, but Congress could pass legislation to bring them back. This would require a change in banking policy and is not expected in the near term.
Does the removal of reserve requirements make banks less safe?
Capital and liquidity rules now replace reserve requirements as the main safety tools. These rules are generally considered stricter and more effective. The FDIC also insures deposits up to $250,000, providing an additional safety layer.
Why did the Federal Reserve remove reserve requirements during the pandemic?
The Federal Reserve wanted to free up cash for banks to lend to businesses and individuals during the economic crisis. The change was meant to be temporary but has remained in place because the Federal Reserve sees modern banking as not needing reserve requirements.
Where can I find a bank's capital ratio?
Banks file quarterly financial reports (called 10-Q forms) with the Securities and Exchange Commission, which are available on the SEC's website. You can also contact your bank directly and ask for its capital ratio and liquidity coverage ratio.