Reserve Requirements

Reserve requirements refer to the amount of money banks must hold on hand, either as cash in their vaults or deposited with the central bank, instead of lending it out. This is a regulation used by central banks to ensure that banks have enough funds available for customers to withdraw. By adjusting these requirements, central banks can influence how much money banks can lend, impacting overall economic activity—lower reserves encourage lending and spending, while higher reserves restrict it. Essentially, it helps maintain financial stability and control inflation.