what does the reserve ratio tell you 
the federal reserve uses the reserve ratio as one of its key monetary policy tools the fed may choose to lower the reserve ratio to increase the money supply in the economy a lower reserve ratio requirement gives banks more money to lend at lower interest rates which makes borrowing more attractive to customers conversely the fed increases the reserve ratio requirement to reduce the amount of funds banks have to lend the fed uses this mechanism to reduce the supply of money in the economy and control inflation by slowing the economy down the fed also sets reserve ratios to ensure that banks have money on hand to prevent them from running out of cash in the event of panicked depositors wanting to make mass withdrawals if a bank doesn t have the funds to meet its reserve it can borrow funds from the fed to satisfy the requirement banks must hold reserves either as cash in their vaults or as deposits with a federal reserve bank on oct 1 2008 the federal reserve began paying interest to banks on these reserves 2 this rate was referred to as the interest rate on required reserves iorr there was also an interest rate on excess reserves ioer which is paid on any funds a bank deposits with the federal reserve in excess of their reserve requirement on july 19 2021 the iorr and ioer were replaced with a new simplified measure the interest on reserve balances iorb 3 as of 2022 the iorb rate is 0 10 u s commercial banks are required to hold reserves against their total reservable liabilities deposits which cannot be lent out by the bank reservable liabilities include net transaction accounts nonpersonal time deposits and eurocurrency liabilities reserve ratio guidelinesthe board of governors of the federal reserve has the sole authority over changes in reserve requirements within limits specified by law as of march 26 2020 the reserve requirement was set at 0 1 that s when the board eliminated the reserve requirement due to the global financial crisis 4 this means that banks aren t required to keep deposits at their reserve bank instead they can use the funds to lend to their customers 4the last time the fed updated its reserve requirements for different depository institutions before the pandemic was in january 2019 banks with more than 124 2 million in net transaction accounts were required to maintain a reserve of 10 of net transaction accounts banks with more than 16 3 million to 124 2 million needed to reserve 3 of net transaction accounts banks with net transaction accounts of up to 16 3 million or less were not required to have a reserve requirement the majority of banks in the united states fell into the first category 5 the fed set a 0 requirement for nonpersonal time deposits and eurocurrency liabilities reserve ratio and the money multiplierin fractional reserve banking the reserve ratio is key to understanding how much credit money banks can make by lending out deposits for example if a bank has 500 million in deposits it must hold 50 million or 10 in reserve it may then lend out the remaining 90 or 450 million which will make its way back to the banking system as new deposits banks may then lend out 90 of that amount or 405 million while retaining 45 million in reserves that 405 million will be deposited again and so on ultimately that 500 million in deposits can turn into 5 billion in loans where the 10 reserve requirement defines the so called money multiplier as 