A:

Most developed economies require a reserve ratio for their banks and other depository institutions, though there are some notable exceptions. In the United States, the Federal Reserve requires that all banks with net transactions accounts exceeding $104 million keep ratios of 10%. All countries in the Eurozone maintain a reserve ratio of 1%, except for Switzerland (higher), Sweden and the United Kingdom (lower).

According to the Organization for Economic Co-operation and Development (OECD), nearly 80% of its member nations impose a reserve requirement as part of national monetary policy.

Reserve Requirements

A reserve requirement is the minimum percentage of amounts of liabilities that depository institutions, such as banks, are required to keep in cash (as deposits) and not lend out. Proponents of a reserve requirement regime argue that higher reserve ratios prevent bank runs and add stability to the financial sector.

The first reserve requirement in the U.S. – a staunch 25% – was established with the National Bank Act of 1863. This only lasted 10 years, however, until the requirements against national bank notes were lifted.

Countries With Inconsistent Reserve Ratio Requirements

Most reserve requirement regimes apply their rules inconsistently. Some countries only impose reserve ratio requirements on shorter-term maturity instruments; this is the case in the Czech Republic, Hungary, Iceland, Poland and Slovakia. Other countries impose lower ratios to foreign currency deposits held by non-residents; both Japan and Korea have this rule.

The U.S., like many countries, only imposes its maximum reserve ratios on large institutions. Banks with less than $13.6 million in transactions accounts have no reserve ratios.

Countries Without Reserve Ratio Requirements

The U.S. is alone among Anglo-centric nations with a reserve ratio. Canada, the U.K., New Zealand and Australia lack reserve requirements. Sweden is the only other notable country without a reserve ratio.

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