What are reserve requirements?

Reserve requirements are like the rulebook for how much money banks must keep on hand when they lend to people.

Imagine you have a piggy bank where you save your allowance. If your mom says, "You can only spend half of what's in your piggy bank," that’s like reserve requirements, it tells the bank how much money it needs to keep aside before it can give loans or money to others.

Banks take your money and use it to help people buy houses, start businesses, or even get a new bike. But they don’t just hand out all the money at once. They have to leave some in their piggy bank, or in this case, in the bank's vault.

If the rule says banks must keep 10% of your money as reserves, that means for every $100 they take from you, they can only lend out $90. The other $10 stays with them, just like you would leave some coins in your piggy bank to make sure you don’t run out.

When the reserve requirements are lower, banks can give out more loans, which helps people and businesses grow. When they’re higher, banks have less money to lend, so everyone might save a bit more or spend a little slower.