What is the purpose of a reserve requirement in banking?

The reserve requirement is the minimum amount of reserves that a commercial bank must hold, either in cash or as deposits with the central bank, to cover potential withdrawals from customers. It is a key tool used by central banks to regulate the money supply and control inflation. By adjusting the reserve requirement, central banks can influence the amount of money that banks are able to lend out. Lowering the reserve requirement encourages more lending and increases the money supply, which can stimulate economic activity, while raising the reserve requirement can restrict lending, slowing down economic growth and helping control inflation.