Money & Finance › Banks & credit › How banks create money: lending and fractional reserves
Reserve requirements (cut to zero in 2020)
Zero since March 2020· Law or rule
Fact, law or dataA rule, statute, definition or measured number.
Reserve requirements forced banks to hold a share of deposits as cash or Fed balances; the Fed cut them to zero in March 2020.
See it on the Money & Finance map →How it works
Before 2020, banks had to keep up to 10% of checking-type deposits in their vaults or in accounts at the Fed. Textbooks tied lending to this rule. In practice, since 2008 the Fed has supplied far more reserves than required and pays interest on them, so the requirement stopped binding. The Fed now steers rates with that interest rate, and capital rules, not reserves, limit lending. Canada, Australia and New Zealand have none either; China still adjusts its ratio actively.
Why it matters
It shows the textbook money-multiplier story no longer describes how US banks create money, and that the Fed now targets interest rates, not the money stock.
Facts, rules and data
The Fed's March 15, 2020 announcement and its Regulation D; weekly H.4.1 data showing about $3 trillion of reserves in 2025, far above the old requirements.
Debates and risks
Whether the Fed will ever bring requirements back, which it legally can, is uncertain.
Connections (2)
▸M0, the monetary base: currency plus bank reserves includes reserves once governed by Reserve requirements (cut to zero in 2020)Fact, law or data
The connection
The monetary base is currency plus banks' reserve balances at the Fed. Reserve requirements once set a floor on those balances relative to deposits, linking the base to the money supply. With requirements at zero since 2020, reserves are held voluntarily, and their size mostly reflects the Fed's bond buying.
When and why
Requirements ran from the National Bank Act of 1863 to March 2020. Reserves were about $3 trillion in 2025, versus well under $100 billion before 2008.
How we know
The Fed's weekly H.4.1 balance sheet reports reserve balances; its discontinued H.3 release once tracked required reserves.
Debates and risks
How many reserves the system actually needs, the 'ample' level, is unknown; the 2019 repo spike showed the Fed had underestimated it.
▸Reserve requirements (cut to zero in 2020) were the 'fraction' in How banks create money: lending and fractional reservesFact, law or data
The connection
In the textbook, a 10% requirement means a $100 deposit lets the bank lend $90, which is redeposited and lent again, multiplying into $1,000 of deposits. In reality banks lend first and find reserves after, the Fed supplies reserves to hold its rate target, and capital is the binding limit. The zero requirement since 2020 made that official.
When and why
Requirements date to the National Bank Act of 1863; the Fed cut them to zero effective March 26, 2020.
How we know
The Fed's 2020 announcement; the Bank of England's 2014 paper 'Money creation in the modern economy' explains why the multiplier story misleads.
Debates and risks
Some economists say reserves still constrain lending at the margin; others say the multiplier never described how banks actually worked.