Reserve requirements

Reserves are electronic money held in accounts at the central bank. Usually only commercial banks can hold reserves. The overall amount in existence is determined by the central bank, though individual commercial banks can lend them to one another or convert them into physical cash. In the past some central banks have set minimum reserve requirements and the authorities sometimes changed the level of required reserves as a way of tightening or loosening monetary policy; China still does this today. Since 2008 the quantity of reserves has grown significantly because of quantitative easing, leading the Federal Reserve and other central banks to pay interest on reserves. This sets a floor under interest rates in the interbank market.