How to Calculate Required Reserves for a Bank

Required reserves are a portion of funds that financial institutions historically had to maintain, either as cash in their vaults or as balances held at a central bank. This requirement served as a tool for monetary policy, influencing the amount of money available for lending within the economy. While this mechanism played a significant role in the past, the Federal Reserve reduced reserve requirement ratios to zero percent in March 2020. This action effectively eliminated the mandatory reserve requirement for all depository institutions in the United States.

Components of Reservable Liabilities

Historically, calculating required reserves involved identifying “reservable” liabilities. These were specific types of deposits and funds held by a bank that the Federal Reserve could subject to reserve requirements. Primary categories included transaction accounts, such as checking and negotiable order of withdrawal (NOW) accounts, which allowed easy payments or fund transfers. Nonpersonal time deposits also previously fell under this classification.

Certain types of liabilities were generally not subject to reserve requirements. These included personal savings deposits and money market deposit accounts, which typically offered higher interest rates and had different withdrawal characteristics. Banks sometimes utilized strategies like “sweep accounts” to temporarily move funds from reservable transaction accounts into non-reservable savings accounts overnight, thereby reducing their reported reservable liabilities and, consequently, their required reserves. The Federal Reserve, authorized by the Federal Reserve Act, established the specific definitions and ratios for these liabilities to implement monetary policy. Depository institutions provided data on these liabilities through regular reports, such as the Federal Reserve’s FR 2900.

Adjusting the Reserve Base

Once gross reservable liabilities were identified, several adjustments were historically applied to arrive at the net amount subject to a reserve requirement. One common adjustment was the vault cash deduction. Physical cash held by a bank in its vaults, used for daily operations, could be counted towards meeting a portion of its reserve obligation. This reduced the amount a bank needed to hold as a balance at the Federal Reserve.

Another adjustment involved the low reserve tranche exemption. A certain initial amount of a depository institution’s net transaction accounts was exempt from reserve requirements. For instance, for 2024, the reserve requirement exemption amount was $36.1 million, and the low reserve tranche was $644.0 million. For 2025, these amounts are projected to be $37.8 million and $645.8 million, respectively. This exemption effectively lowered the reservable base, particularly benefiting smaller institutions by reducing their overall reserve burden if requirements were in place.

Completing the Reserve Calculation

After adjusting the reserve base, the final step in determining required reserves historically involved applying established reserve requirement ratios. Prior to March 2020, net transaction accounts above the low reserve tranche were subject to a 10 percent reserve requirement ratio. This calculated amount represented the total reserves a bank was required to hold.

The calculation of reserves was based on an average of deposits over a specific “computation period.” For weekly reporters, this period typically spanned 14 consecutive days, while for quarterly reporters, it was a 7-day period. Following the computation period, a “maintenance period” was the subsequent timeframe during which the calculated reserve amount had to be held by the bank. This maintenance period typically lasted 14 consecutive days. These calculation steps and periods were historically central to reserve management.