The amount of reserves that a commercial bank is required to hold is equal to a specified percentage of its total deposits. This percentage is known as the reserve requirement or reserve ratio. The reserve requirement is set by the central bank (such as the Federal Reserve in the United States) and can vary based on the type of deposits and the financial policies in place.
For example, if the reserve requirement is set at 10%, and the commercial bank has $1,000,000 in deposits, it would be required to hold $100,000 in reserves. The remaining $900,000 could be used for loans or other investments.
It's important to note that banks can hold excess reserves beyond the required amount, which can provide them with more flexibility in their lending practices. Reserve requirements can also be adjusted by central banks as a monetary policy tool to influence the economy.
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