DEFINITION of 'Reservable Deposit'

A bank deposit subject to reserve requirements. Reserve requirements are set by the Federal Reserve's board of governors and are a tool of monetary policy.

The required reserves are also known as "sterile reserves," because they do not earn interest.

BREAKING DOWN 'Reservable Deposit'

The Federal Reserve Board requires banks to hold a certain percentage of customer deposits in their vaults or at the nearest Federal Reserve bank. This practice is known as fractional reserve banking, because only a fraction of customer deposits are kept on hand for immediate withdrawal. The rest of the money is loaned out so the bank can earn interest on it.

Critics consider the lack of interest earned on required reserves to be a tax on banks and think that the Federal Reserve should pay a market interest rate on deposits kept at Federal Reserve banks. They also argue that the U.S. reserve requirement of 10% is too high to allow U.S. banks to compete with banks in other developed countries that have lower requirements.

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