# How does an increase in the minimum reserve requirement affect the monetary base?

Monetary base is defined as currency+currency held by banks+deposits of banks at central bank. We assume that the current reserve is below the minimum reserve requirement. Which component of monetary base is affected? Please note the distinction between money supply and monetary base.

• Since the financial crisis, in the US the monetary base has exploded, mainly because commercial banks hold much more as reserves in the FED that they are required to, so minimum reserve requirements have no impact – Henry Feb 5 '20 at 0:24
• Much the same elsewhere, for example in Switzerland and the UK – Henry Feb 5 '20 at 0:28
• What if the reserve is below the minimum reserve requirement (a counterfactual question)? – Alex Wang Feb 5 '20 at 14:30

In a fractional reserve banking system, the maximum portion of the money supply represented by bank-issued loans relates to the reserve requirement as $$M_{loans} = \frac{deposits}{r} - deposits$$ where $$r$$ is the reserve requirement expressed as a decimal.
For example, a bank holding \\$1000 in deposit liabilities facing a reserve requirement of 1% is free to issue $$\1000/.01 - \1000 = \99,000$$ in new money in the form of loans. Doubling the reserve requirement to 2% would reduce this number to $$\49,000$$.