This is a very misleading explanation. Reserve requirements are how much cash (or equivalents) the banks must hold in comparison to certain types of liabilities

This is a very misleading explanation. Reserve requirements are how much cash (or equivalents) the banks must hold in comparison to certain types of liabilities. The liabilities are usually customer deposits, or other liabilities that can be called on a moment notice. See: http://en.wikipedia.org/wiki/Reserve_requirement http://en.wikipedia.org/wiki/Reserve_requirement This is not just some arcane rule, it is actually a very important requirement that prevents bank failures. That is it prevents a bank from running out of cash to pay its depositors. If a bank runs out of cash, even for a short time and even if it has large amount of long term illiquid assets, the bank will probably fail as people will panic, there will be a run on the bank, etc. It is true that banks usually use something called federal funds to satisfy the reserve requirement. Federal funds are money held on account at the federal reserve. Thus, each banks has an account at the Fed, that has money in it, and that money is called the federal funds. The federal funds are considered to be the equivalent of cash for the reserve requirement, so most banks satisfy the reserve requirement using their federal funds (as holding large amounts of cash in their vaults is expensive and inconvenient). Nevertheless, the reserve requirement is not some unimportant technical rule that emerged from the Fed lending system as your post suggests, but an important requirement needed to ensure banks stay solvent and are actually able to give your money when you go to an ATM machine.