Required Reserves

Definition

Required reserves are the minimum amount of funds that banks must hold in reserve against their customers' deposits. These reserves are set by central banks to ensure stability in the banking system and control inflation.

Analogy

Imagine playing a game where you have to keep a certain number of marbles aside as reserves while playing with the rest. Required reserves work similarly for banks - they have to keep a portion of their customers' deposits aside as reserves while lending out the remaining funds.

Related terms

Reserve Ratio: The percentage of customer deposits that banks are required to hold as reserves.

Excess Reserves: Any additional funds held by banks above the required reserve amount.

Fractional Reserve Banking System: A banking system where only a fraction (portion) of customer deposits is kept on reserve, allowing banks to lend out most of the deposited funds.