Federal Reserve Requirement

The federal reserve requirement is the amount of liquid assets that Federal Reserve System banks must hold. The federal reserve requirement demands that these assets be held in cash or on deposit with the Federal Reserve System. The federal reserve requirement is usually a percentage of bank's demand and time deposits. Within legal limits, the Board of Governors has sole authority over changes in the federal reserve requirement. The purpose of the federal reserve requirement is to ensure that the banks always have enough cash to pay depositors. The federal reserve requirement is also a method to increase or decrease the money supply. In theory, as the federal reserve requirement is increased, cash in the system is reduced and visa versa. As of 2005, the federal reserve requirement is 10% on "transaction deposits" and zero on time deposits and all other deposits. The federal reserve requirement is a cost to the banking system. Funds deposited to the Federal Reserve under the federal reserve requirement do not receive interest. The Federal Reserve has advocated the payment of interest on the reserves that banks maintain at the Federal Reserve Bank under the federal reserve requirement. The Federal Reserve may also impose a federal reserve requirement of any size on the amount banks in the United States owe, on a net basis, to their foreign affiliates or to other foreign banks.