When you deposit money into a bank, you probably assume the bank keeps all of it safely locked away. In reality, banks lend out much of that money — but they’re required to keep some cash on hand just in case. That safety cushion is called bank reserves, and it plays a major role in keeping the financial system stable.
Let’s break down what bank reserves are, how they work in the U.S., and why they matter to everyday Americans.
What Are Bank Reserves?
Bank reserves are the amount of cash and easily accessible funds that banks are required (or choose) to keep available at all times. This money is not loaned out to customers.
Banks typically hold reserves in two places:
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Cash stored in their own vaults
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Money kept in accounts at the Federal Reserve
The main purpose of reserves is simple: to make sure banks can handle withdrawals, even if many customers want their money at the same time.
Why Bank Reserves Are So Important
Imagine if everyone rushed to the bank on the same day to withdraw their savings. If the bank didn’t have enough cash available, panic could spread quickly — a situation known as a bank run.
Reserves help prevent this by ensuring banks always have enough liquidity to:
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Cover everyday withdrawals
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Handle unexpected financial stress
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Maintain trust in the banking system
Beyond protecting customers, reserves also give the Federal Reserve a way to influence the economy.
How the Federal Reserve Uses Reserve Requirements
In the U.S., the Federal Reserve has historically set a reserve requirement, which is the minimum percentage of customer deposits banks must keep in reserve.
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If the Fed raises the reserve requirement, banks have less money to lend → borrowing slows → the economy cools down.
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If the Fed lowers the requirement, banks can lend more → spending increases → the economy speeds up.
This makes reserve requirements a powerful economic tool — although in recent years, the Fed has relied more on other methods, like adjusting interest rates and using quantitative easing.
What Changed in 2020?
In response to the COVID-19 crisis, the Federal Reserve made a major move:
👉 As of March 26, 2020, the reserve requirement was set to 0%.
This means banks are no longer required to hold a specific percentage of deposits as reserves. The goal was to encourage lending and keep money flowing during an economic emergency.
However, this doesn’t mean banks can operate recklessly — other safety rules still apply.
Required Reserves vs. Excess Reserves
There are two main types of reserves:
Required Reserves
This is the minimum amount a bank must keep (when a requirement exists).
Excess Reserves
These are funds held above the required amount.
In normal times, banks don’t like holding excess reserves because:
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Cash sitting idle doesn’t generate strong returns
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Inflation reduces the value of unused money
Banks generally prefer to lend money out to earn interest — unless economic conditions make lending too risky.
How Economic Conditions Affect Reserves
Bank behavior changes depending on the economy:
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During strong economic growth:
People borrow more, banks lend more, and reserves tend to shrink. -
During recessions or crises:
Borrowing slows, banks become cautious, and reserves increase.
After the 2008 financial crisis, banks dramatically increased their reserves due to fear, uncertainty, and new regulations.
A Brief History of Bank Reserves in the U.S.
For much of U.S. history, banking was loosely regulated at the state level. This led to frequent bank failures and financial panics — especially before the 20th century.
The tipping point came after the Panic of 1907, which exposed how fragile the system was. As a result:
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The Federal Reserve System was created in 1913
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Standardized rules were introduced to control the money supply and stabilize banks
Later, during the high inflation of the 1970s, Congress expanded the Fed’s role to focus on price stability and economic balance.
How Reserve Requirements Are Calculated
When reserve requirements were active, they were based on a bank’s net transaction accounts, which include:
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Checking accounts
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Certain savings and transfer accounts
The calculation was straightforward:
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$500 million in deposits
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10% reserve requirement
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Required reserves = $50 million
Are Bank Reserves Assets or Liabilities?
From a bank’s perspective, reserves are considered assets, not liabilities. They appear on the bank’s balance sheet as funds the bank owns and can access when needed.
Where Banks Keep Their Reserve Money
Banks don’t keep all reserves in one place. They may:
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Store cash in their own vaults
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Hold funds at one of the 12 regional Federal Reserve Banks
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Keep some reserves with larger banks for convenience
Cash needs can rise during certain times, like holidays, when people withdraw more money. Afterward, excess cash is often sent back to the Federal Reserve.
Bank Reserves vs. Liquidity Coverage Ratio (LCR)
Even though reserve requirements are currently set to zero, banks must still follow liquidity rules under international standards known as Basel III.
One key rule is the Liquidity Coverage Ratio (LCR), which requires banks to hold enough high-quality liquid assets to:
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Cover 30 days of expected cash outflows during a crisis
This rule was strengthened after the collapse of Lehman Brothers in 2008 and helps ensure banks can survive short-term financial shocks without government bailouts.
What Happened After the 2008 Financial Crisis?
Before 2008, banks earned nothing on their reserves. That changed when the Federal Reserve began paying interest on reserve balances.
As a result:
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Banks found it safer to hold reserves
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Excess reserves surged
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Lending did not increase as much as expected
Banks preferred earning small, risk-free interest instead of taking chances on risky loans during uncertain times.
The Bottom Line
Bank reserves may sound technical, but they affect everyone who uses a bank — which is nearly all of us.
Even though U.S. banks are no longer required to keep a fixed percentage of deposits in reserve, strict liquidity rules remain in place to protect customers and the broader economy.
Understanding bank reserves helps explain:
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Why banks don’t collapse during crises
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How the Federal Reserve influences the economy
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Why financial regulations matter for everyday stability
At the end of the day, bank reserves are one of the quiet safeguards working behind the scenes to keep your money — and the economy — secure.
