First of all let us inderstand what is reserve requirement ” Reserve requirements means the portion of funds that a bank or depository institution must hold in reserve against specified deposit liabilitiesBoard of Governors has sole authority over changes in reserve requirements.

This reserve part, bank must hold in the form of vault cash or deposits with Federal Reserve Banks.

there are two basic reason for reserve requirement

1 Safeguard the public’s deposits.
2 Give the central bank a powerful tool.

other reasons are as follow

It leads to financial stability objective.

Reserve requirements in conjunction with an averaging period for reserve maintenance can provide a useful buffer against disturbances in the money market.

reserve requirements can support the price stability

In the long run, reserve requirements can also influence the level of bank lending, deposit rates, and the quantity of credit and deposits