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Fractional Reserve

Overview#

Fractional Reserve is the common practice by commercial banks of accepting deposits, and making loans or investments, while holding reserves at least equal to a fraction of the bank's deposit liabilities.

Reserves are held as currency in the bank, or as balances in the bank's accounts at the Central Banking System bank. Fractional-reserve banking is the current form of banking practiced in most countries worldwide.

Fractional Reserve Requirements#

Some banks are exempt from holding reserves, but all banks are paid a rate of interest on reserves. This rate is called the "interest rate on reserves" or the "interest rate on excess reserves," the IOR and IOER, respectively. This rate acts as an incentive for banks to keep excess reserves. Banks with less than $15.2 million in assets are not required to hold reserves. Banks with assets of less than $110.2 million but more than $15.2 million have a 3% reserve requirement, and those banks with over $110.2 million in assets have a 10% reserve requirement.

More Information#

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