As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. Show The following content explains the Board’s authority to impose reserve requirements and how reserve requirements were administered prior to the change in reserve requirement ratios to zero. Additional detail on this reserve requirement regime can be found in the archived Reserve Maintenance Manual: HTML | PDF. The Federal Reserve Act authorizes the Board to establish reserve requirements within specified ranges for purposes of implementing monetary policy on certain types of deposits and other liabilities of depository institutions. The dollar amount of a depository institution's reserve requirement is determined by applying the reserve requirement ratios specified in the Board's Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204) to an institution's reservable liabilities (see table of reserve requirements). The Federal Reserve Act authorizes the Board to impose reserve requirements on transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities. Prior to the change effective March 26, 2020, reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the depository institution. A certain amount of net transaction accounts, known as the "reserve requirement exemption amount," was subject to a reserve requirement ratio of zero percent. Net transaction account balances above the reserve requirement exemption amount and up to a specified amount, known as the "low reserve tranche," were subject to a reserve requirement ratio of 3 percent. Net transaction account balances above the low reserve tranche were subject to a reserve requirement ratio of 10 percent. The reserve requirement exemption amount and the low reserve tranche are indexed each year pursuant to formulas specified in the Federal Reserve Act (see table of low reserve tranche amounts and exemption amounts since 1982). For more history on the changes in reserve requirement ratios and the indexation of the exemption and low reserve tranche, see the annual review table. Additional details on reserve requirements can be found in this Federal Reserve Bulletin article (119 KB PDF), the appendix of which has tables of historical reserve ratios. Notes: The Board's Regulation D (Reserve Requirements of Depository Institutions) provides that reserve requirements must be satisfied by holding vault cash and, if vault cash is insufficient, by maintaining a balance in an account at a Federal Reserve Bank. An institution may hold that balance directly with a Reserve Bank or with another institution in a pass-through relationship. Reserve requirements are imposed on "depository institutions," defined as commercial banks, savings banks, savings and loan associations, credit unions, U.S. branches and agencies of foreign banks, Edge corporations, and agreement corporations.
What happens when Fed increases reserve ratio?Increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.
What causes reserves to increase?Loans to banks, loans to other firms, and direct asset purchases by the central bank all increase the level of reserves in the banking system by exactly the amount lent.
What happens if the Federal Reserve lowers the reserve ratio?When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation's money supply and expands the economy.
What are the effects of changing reserve ratio?An increase in reserve requirements raises the effective tax rate on deposit services and, hence, lowers the amount of financial intermediation carried out by banks.
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