ng and non-interest-bearing checking accounts). Required reserves are a fraction of such deposits; the Board of Governors within limits prescribed by law sets the fraction-the required reserve ratio-. Thus, total required reserves expand or contract with the level of transaction deposits and with the required reserve ratio set by the Board; in practice, however, the required reserve ratio has been adjusted only infrequently. Depository institutions hold required reserves in one of two forms: vault cash (cash on hand at the bank) or, more important for monetary policy, required reserve balances in accounts with the Reserve Bank for their Federal Reserve District. Depositories use their accounts at Federal Reserve Banks not only to satisfy their reserve requirements but also to clear many financial transactions. #Given the volume and unpredictability of trans-actions that clear through their accounts every day, depositories need to maintain a cushion of funds to protect themselves against debts that could leave their accounts overdrawn at the end
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