Reserve Requirements

Central bank regulations requiring private banks to hold specific fractions of transactions and term deposits either as vault cash or as funds on deposit at the central bank.

For example, a bank receives a deposit of U.S. $100,000, and the reserve requirement is 20%. The bank is thus required to keep U.S. $20,000 in the form of reserves. The remaining U.S. $80,000 becomes a loan, which is deposited in the borrower's bank.