Reserve Ratio

The reserve ratio is the fraction of customer deposits a bank holds in reserve, as vault cash or balances at the central bank, rather than lending out. Regulators historically set a minimum requirement, but the Federal Reserve cut required reserve ratios for US banks to zero in March 2020, relying instead on capital and liquidity rules to constrain lending.

Why it matters

The reserve ratio defines how far a banking system can expand money on a given base: the lower the ratio, the more deposits can be created per unit of reserves. It is also the arithmetic behind bank runs, since no fractional reserve bank can pay out all depositors at once. Some central banks, notably China's, still adjust reserve requirements actively as a policy lever, while others treat them as obsolete in a world of abundant reserves and interest paid on them.

In the gold vs bitcoin debate

Fractional reserves are where both monetary metals and bitcoin historically lose their discipline. Goldsmiths issuing more notes than vaulted gold invented the practice, and classical gold standards operated with fractional backing that periodically failed in runs. Bitcoiners argue the same dynamic reappears whenever coins are held by intermediaries, citing exchange failures as bank runs in miniature. The counterargument from economists is that fractional banking is a feature, financing growth by mobilizing idle savings. Whether money should be fully reserved is a century-old argument that both gold and bitcoin keep alive.