Final answer:
The minimum reserve requirement is the mandatory capital reserve that a bank must hold against deposits, used to ensure stability and manage lending capacity. The Federal Reserve sets these requirements, which can be adjusted as a method for conducting monetary policy, although significant shifts in requirements are uncommon.
Step-by-step explanation:
Understanding the Minimum Reserve Requirement
The minimum reserve requirement is a central bank regulation that dictates the minimum amount of reserves a bank must hold against its deposit liabilities. Specifically, this requirement is a percentage of the bank's deposits which must be held as cash in their vault or as a deposit with the central bank.
For example, in early 2015, the Federal Reserve required banks to hold reserves equal to 0% of the first $14.5 million in deposits, 3% of deposits up to $103.6 million, and 10% of any amount above $103.6 million. These requirements are intended to ensure that banks maintain a buffer of readily available funds to meet withdrawal demands.
Changes in the reserve requirements are a tool for executing monetary policy. By adjusting these requirements, the central bank can influence the lending capacity of banks.
Increasing reserve requirements restricts lending potential as banks must hold more capital, while decreasing the reserve level can enhance the lending capacity by freeing up capital. However, it's worth noting that large changes to reserve requirements are rare due to the potential disruption they could cause.
Since December 27, 1990, certain types of deposits, such as nonpersonal time deposits and eurocurrency liabilities, have had a reserve ratio of zero under the Federal Reserve Board's Regulation D.
This indicates that not all types of deposits are subject to the same reserve requirements. Regular review and adjustments to the dividing lines for reserve requirements reflect ongoing monetary policy decisions and economic conditions.