Changing reserve requirements directly changes how much banks can lend: lowering the required ratio frees deposits that were locked up, letting banks push more money into loans, while raising it forces banks to pull funds back from lending and hold them at the Fed or in vault cash. That mechanism still exists on paper, but it has been dormant since March 26, 2020, when the Board of Governors of the Federal Reserve System cut every reserve requirement ratio to zero percent and left it there.1Board of Governors of the Federal Reserve System. Reserve Requirements Today the Fed steers bank lending through the interest it pays on reserves, not through the ratio.
How the Ratio Translates Into Lending
A reserve requirement is the minimum share of a bank’s deposits that it cannot lend out. Banks satisfy the requirement with vault cash or with balances held at a regional Federal Reserve Bank.1Board of Governors of the Federal Reserve System. Reserve Requirements
The dollar amount comes from applying the ratio to reservable liabilities, mostly transaction accounts. Take a 10 percent ratio. A bank that receives a $100 deposit sets aside $10 and can lend $90. When that $90 lands as a deposit at another bank, $9 gets set aside and $81 becomes lendable. The chain keeps going. This is the money multiplier, and it is why even a small shift in the ratio moves an outsized amount of credit through the system.
What Happens When the Fed Cuts the Ratio
Lowering the ratio releases funds that were sitting as required reserves. A bank that was holding the minimum suddenly has excess reserves it can lend. Repeat that across every depository institution and a cut of even one percentage point can free billions of dollars in new lending capacity overnight. The multiplier then compounds it as each new loan becomes a deposit somewhere else.
Historically the Fed cut the ratio to push more credit into a slow economy. More loans meant more spending, which supported growth and employment.
What Happens When the Fed Raises the Ratio
Raising the ratio works the other direction, and it is not gentle. Banks that were fully lent out have to rebuild reserves immediately. They can call in loans, sell assets, or stop making new loans until deposits catch up. Credit contracts across the system, spending slows, and price pressure eases.
The bluntness is the problem. An interest-rate change nudges behavior. A reserve-ratio hike forces a balance-sheet adjustment on a fixed date. A single percentage-point move can shift tens of billions of dollars in one step, which is a lot of force for a tool with no fine adjustment. That is why the Fed leaned on it less and less over the decades and eventually set it aside.
The Legal Authority Is Still There
Section 19 of the Federal Reserve Act, codified at 12 U.S.C. ยง 461, gives the Board authority to impose reserve requirements on transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities.1Board of Governors of the Federal Reserve System. Reserve Requirements The statute sets outer limits: for transaction balances above a low reserve tranche, the Board can set the ratio anywhere from zero to 14 percent; within the low reserve tranche the ceiling is 3 percent, and the ratio may also be zero.2Federal Register. Reserve Requirements of Depository Institutions
The Board exercises that authority through Regulation D, 12 CFR Part 204, which defines the ratios, the reservable liabilities, and the thresholds that determine how much each bank owes. The Board also keeps indexing the two threshold numbers annually. For 2026, the exemption amount is $39.2 million and the low reserve tranche runs up to $674.1 million.3eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions Both are academic at the moment because the ratio applied to every tier is zero, but the annual indexing means the Board could reimpose a nonzero ratio without first having to recalibrate the thresholds.
The 2020 Move to Zero
On March 15, 2020, during the early weeks of the COVID-19 disruption to financial markets, the Board announced it was cutting every reserve ratio to zero percent, effective March 26, 2020.1Board of Governors of the Federal Reserve System. Reserve Requirements The Regulation D amendments took effect on March 24, 2020.4Federal Register. Regulation D: Reserve Requirements of Depository Institutions
The change did not quietly expire. Every reserve ratio in Regulation D remains at zero percent as of 2026, and the Board has not signaled plans to reimpose one.3eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions The lever exists; it is simply not being pulled.
How the Fed Influences Bank Lending Without the Ratio
In January 2019, well before the ratios went to zero, the Federal Open Market Committee formally adopted an ample-reserves framework. Under that approach, “an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates, and in which active management of the supply of reserves is not required.”5Board of Governors of the Federal Reserve System. Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization
The main tool is the Interest Rate on Reserve Balances (IORB), which the Fed pays on every dollar a bank leaves in its reserve account. As of December 2025, the IORB is 3.65 percent.6Board of Governors of the Federal Reserve System. Interest on Reserve Balances The rate sets a soft floor under short-term lending. A bank that can earn 3.65 percent risk-free by parking money at the Fed has little reason to lend it to another bank for less, and if market rates dip below the IORB, banks arbitrage the gap and push the market rate back up.
To reach institutions that do not earn IORB, the Fed also runs the Overnight Reverse Repurchase Agreement facility, which offers a return to a broader set of counterparties and keeps very short rates inside the FOMC’s target range.7Federal Reserve Bank of New York. Reverse Repo Operations Together, the administered rates now do what changing the ratio used to do: shape the cost of funds banks face, which in turn shapes how aggressively they lend.
Why Banks Still Hold Reserves at All
Zero ratios did not empty out reserve accounts. Banks hold reserves voluntarily because the IORB itself is attractive on a risk-free, perfectly liquid asset, and because they need reserves to settle payments and manage intraday liquidity.6Board of Governors of the Federal Reserve System. Interest on Reserve Balances The Fed needs them to hold ample reserves too, because the administered-rate framework only works when reserves are plentiful.
What This Changed for Bank Customers
One consequence of the 2020 Regulation D overhaul was the removal of the federal six-transfer limit on savings and money market accounts. Before April 2020, federal rules capped certain withdrawals and transfers from those accounts at six per monthly statement cycle. That cap disappeared at the federal level and has not returned.
The removal is permanent, not a suspension. Individual banks, though, can still enforce their own transfer limits as internal policy, and many kept the old six-per-month rule in place after the federal requirement was dropped. If your bank still limits savings transfers, that is now the bank’s choice, not a federal mandate.