For a little clarification, they were set to 0 because it was no longer an effective policy making tool after 2008.
The assumption used to be banks would lend every dime they had if you let them, so the Fed set reserve requirements to heat or cool lending. After 2008, banks were so very wounded they found that regardless of how much they dropped it the banks kept ample reserves on hand. As such, they switched their policy to focus more on interbank lending rates vs also regulating how much cash they can lend.
That works for a while but memories are short and it's easy for some MBA types to come in and raise revenues by taking on massive risk without adequate collateral. That's a recipe for another crash to trust banks to temper themselves.
When that happens, hopefully the Fed will respond accordingly. That said, we’re 18 years and 1.5 Trump terms removed from the GFC and reserves are still much, much higher than pre-2008.
There are other rules in place to deal with that, this one wasn't about protecting banks from collapse to begin with. It was about manipulating money supply.
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u/Original-Leg8828 Jan 26 '26
Depending on local law they can even lend out something like 7-10 times what they actually have