RESERVE REQUIREMENTS: Rules by the Federal Reserve System governing the amount of bank reserves that banks must keep to back up their deposits. Legal reserve requirements came about because banks that practice fractional-reserve banking are sometimes inclined to make too many interest-paying loans and neglect to keep enough reserves on hand to pay their depositors. In principle, the Fed can alter reserve requirements to control the money supply. In practice, however, the Fed prefers to use open market operations or the discount rate. See also | Federal Reserve System | bank reserves | reserves | fractional-reserve banking | bank panic | money supply | open market operations | discount rate | monetary policy | Federal Open Market Committee | required reserves |
