What is a reserve rate?

It is a percentage of the bank's deposits. A nation's central bank sets the percentage rate. In the United States, the Federal Reserve Board of Governors controls the reserve requirement for member banks. The bank can hold the reserve either as cash in its vault or as a deposit at its local Federal Reserve bank.

What are reserve requirements?

Reserve requirements are Federal Reserve rules that require banks and other financial institutions to keep a strict percentage of their deposits on reserve at a Federal Reserve bank. The Federal Reserve determines the appropriate percentage. How Do Reserve Requirements Work? For example, Bank XYZ has $400 million in deposits.

Why do banks have a reserve?

Reserves exist to prevent bank runs, which occur when a large number of customers withdraw their money at the same time. Banks keep their reserves in an on-site vault or at their local Federal Reserve bank and earn a modest interest rate on reserve-held funds. The Federal Reserve’s Board of Governors sets the bank reserve requirement.