How do reserve requirements imposed by central banks affect the credit creation capacity of commercial banks?

Reserve requirements are rules set by central banks that determine how much money commercial banks must keep on hand and not lend out. When a central bank increases reserve requirements, banks have to hold more money in reserve, which means they can lend less to customers. This reduction in lending capacity can slow down the growth of credit in the economy, making it harder for people and businesses to borrow money. For example, if a bank has $1 million in deposits and a reserve requirement of 10%, it must keep $100,000 in reserve and can lend out $900,000. If the reserve requirement increases to 20%, the bank would only be able to lend out $800,000, limiting credit availability.