01/04/2026
Do U.S. Banks require a reserve to make loans?
AI Overview
No, U.S. banks do not currently need a specific reserve to make loans because the Federal Reserve set reserve requirements to zero percent in 2020, meaning banks aren't legally required to hold reserves against deposits. Instead, banks create loans and deposits simultaneously, relying on other factors like capital adequacy, risk management, and the need for sufficient funds for daily transactions, borrowing from other banks or the Fed if needed.
How Lending Works Now (Simplified):
Loan Creation: When you get a loan, the bank creates a new deposit in your account and simultaneously records the loan as an asset, essentially creating money.
Reserves are for Payments: Banks need reserves (cash or balances at the Fed) to cover withdrawals and payments between banks, not to fund the loan itself.
Liquidity & Capital: Banks manage liquidity by ensuring they have enough funds for daily operations and meet capital requirements (equity levels) to absorb losses, not reserve ratios.
Federal Reserve Tools: The Fed influences lending by setting interest rates (like the Interest on Reserve Balances), not by mandating reserves.
Key Takeaway: The idea that banks lend out deposited money from a pool of reserves is outdated; loans create deposits, and banks can access reserves as needed from the Fed or other banks.
