What is the primary purpose of reserve requirements set by central banks for commercial banks?

The primary purpose of reserve requirements set by central banks for commercial banks is to ensure financial stability and liquidity in the banking system. These requirements dictate the minimum amount of funds that banks must hold in reserve and not lend out, which helps to protect against bank runs and ensures that banks have enough money available to meet customer withdrawals. For example, if a central bank sets a reserve requirement of 10%, a bank with $1 million in deposits must keep $100,000 in reserve and can only lend out $900,000. This system helps maintain trust in the banking system because it ensures that banks are not lending out all their deposits and can provide cash when needed. Ultimately, reserve requirements play a crucial role in controlling the money supply and maintaining economic stability.