Definition of Reserve Requirements

The specific amount of funds that a bank is required to hold in its saving or reserve so that in case of any sudden withdrawals, the bank will be able to meet its liabilities.  Nowadays because of the COVID-19 pandemic, the reserve requirements are set to 0. But in the usual situation if a bank does not have enough reserve on its own, then it will borrow from other banks to maintain a specific fund in its reserve. The bank can also borrow from the Federal discount window

Example of Reserve Requirements:

Let’s suppose a bank has a total amount of $ 2000,000. Then every night, it must have $200,000 in its reserve to manage any liabilities. It means that the bank is allowed to lend out a total amount of $1800, 000.