The amount of reserves that a commercial bank is required to hold is generally equal to a specific percentage of its demand deposits. This percentage is known as the reserve requirement, and it is set by the central bank or monetary authority of a country.
In other words, the reserves a bank must hold are not equal to the total amount of its demand deposits but rather a fraction of that amount, as determined by the reserve requirement ratio.
So, the correct understanding would be that reserves are a percentage of demand deposits. If the reserve requirement is, for example, 10%, and the bank has $1 million in demand deposits, it would need to hold $100,000 in reserves.
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