What it is
These reserves represent funds that banks have not loaned out. Banks are sometimes required to hold a certain percentage of their deposits as reserves (reserve requirements), though the Federal Reserve set its requirement to zero in March 2020. Banks also hold excess reserves beyond any requirements for operational liquidity and to manage daily transactions.
The level of bank reserves in the financial system influences the federal funds rate, which is the interest rate at which banks lend reserves to each other overnight. When the Federal Reserve conducts quantitative easing, it increases bank reserves; quantitative tightening reduces them. Changes in reserve levels can affect short-term interest rates and market liquidity.
Why it matters
Bank reserves are crucial for the stability of the banking system and the Fed's ability to control short-term interest rates.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice