What is the reserve requirement in banking?

The reserve requirement in banking refers specifically to the ratio of deposits that banks are mandated to keep as reserves. This requirement is a crucial aspect of monetary policy, as it affects how much money banks can lend. By enforcing a specific reserve ratio, central banks aim to ensure that financial institutions maintain enough liquidity to meet withdrawal demands from customers and to support stability in the banking system.

When banks receive deposits, they are required to set aside a certain percentage of those deposits as reserves, which cannot be used for lending or investment purposes. This requirement helps protect depositors and reduces the risk of bank failures caused by insufficient funds to cover withdrawals. In contrast, the other choices pertain to different aspects of banking operations: the minimum capital a bank must hold relates to capital adequacy regulations, the interest rate charged on loans pertains to lending practices, and the total deposits banks can retain is not a standard banking term but relates more closely to the principles of monetary policy and capital use. These factors are influenced by, but are not synonymous with, the reserve requirement.