Term of the Day
Reserve requirements, a tool of monetary policy, are computed as percentages of deposits that banks must hold as vault cash or on deposit at the central bank (in the United States in a Federal Reserve Bank), rather than, perhaps, lend out. Reserve requirements represent a cost to the banking system. Bank reserves, meanwhile, are used in the day-to-day implementation of monetary policy by the Federal Reserve.
As of 2004, in the United States, the reserve requirement are 10% on "transaction deposits" (component of money supply "M1"), and zero on time deposits and all other deposits.
As "a tool of monetary policy", they are one way of influencing the country's financial behavior, borrowing, and interest rates.