A reserve is the amount a bank must keep available rather than lend or invest.
Bank reserves can consist of cash held in a bank’s vaults and balances held at a central bank. They help institutions meet withdrawal requests, settle payments with other banks, and manage liquidity. In some countries, regulators require banks to hold a minimum reserve amount; in others, formal reserve requirements have been reduced or eliminated.
A reserve requirement is not the same as a bank’s total capital. Capital absorbs losses and supports the institution’s solvency, while reserves are liquid assets used primarily for payments and withdrawals. Banks also hold additional liquidity voluntarily because customers’ cash needs and payment flows are uncertain.
The level and design of reserve rules differ across jurisdictions. Central banks can influence banking liquidity through interest rates, lending facilities, and operations in financial markets.