Fed Junks Reserve Requirements for Demand Deposits, Adding $200 Billion to Bank Bailout
April 28, 2020 (EIRNS)—On March 26 the Federal Reserve put into operation a policy change that eliminated reserve requirements that U.S. banks need to hold on demand deposits, which means on checking accounts.
Banks, for sound reasons, usually were obliged to hold reserve requirements of the following level: for medium to large banks, which hold the vast majority of checking accounts and deposits, they had to hold a 10% reserve ratio: meaning that if a bank customer held $1,000 at the bank in a checking account, the bank had to set aside $100 in reserves. Smaller banks had lower reserve requirements.
This practice, though the reserve ratio might vary, goes back more than 200 years in the U.S. banking system. This meant that if a bank customer wrote a large check that bounced, the bank would not fail (since the money the bank lent might come from other customers’ deposits).