Article: https://www.federalreserve.gov/monetarypolicy/reservereq.htm
In: Economics
The “Reserves Requirement” set by the Fed is just setting the amount of money that the bank needs to store at the Fed – not the amount of cash that it need to maintain at its own banks to be considered solvent.
Federal Law requires interstate banks in the US to deposit a percentage of their total deposits with the Fed, which the Fed gets to set.
There’s nothing necessary about banks storing their money with the Fed. The reason that this was done was because there was a lot of opposition to the formation of a Federal Central Bank when in the 1930’s when the Fed was created. To help get Congress to agree to create the Fed, it was structured in a rather bizarre way to make it look like it wasn’t really a central bank (even though it was). The reserve requirement was part of this structure as it made the Fed appear to just be a normal bank (even though its not).
The Fed has been slowly moving away from that model for the past 20 years by slowly reducing the reserve requirement. It would have gotten there eventually, but used the current Coronavirus crisis as an excuse to fast track the 0% requirement.
This does not mean that banks can hold $0 in deposits. The ratio of cash on hand to deposits that banks need to maintain is controlled by the Fed’s Capital Requirements. The Fed’s Capital Requirements are incredibly complex but haven’t changed much in decades and have a minimum of 4% (though they are frequently higher).
All of the above is only true in the US. The terms “Reserve Requirements” and “Capital Requirements” can and do mean completely different things in other countries.
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