Every commercial bank in the United States holds an account at a Federal Reserve Bank, and the balance in that account is a distinct form of money used only between institutions. This describes how the plumbing works, not what any individual should do with money.
Reserves are settlement money
When a customer of one bank pays a customer of another, the deposit shrinks at one institution and grows at the other, leaving an obligation between the two banks.
That obligation is settled by transferring reserve balances between their accounts at the central bank, which is the only asset both institutions treat as final payment.
Households and businesses cannot hold reserves. They hold deposits, which are claims on a commercial bank, and the two circulate in separate layers of the system.
Payment volume drives demand
A bank needs enough reserves to meet outgoing payments through the day, and those flows are large and imperfectly predictable.
Running short means borrowing, so banks hold buffers sized against the volatility of their own payment flows rather than against a fixed rule.
Regulatory liquidity requirements adopted after the financial crisis increased those buffers substantially, independent of any reserve requirement.
The interbank market allocates the balances
Banks that end a day with surplus reserves lend to banks that are short, at a rate negotiated between them for overnight funds.
That rate is the operational target of monetary policy, and its movements pass into the rates banks charge and pay across the economy.
The central bank influences it by setting the rate paid on reserve balances and by offering facilities that lend and absorb funds at defined rates.
The framework shifted after the crisis
For most of the twentieth century the system operated with scarce reserves, and small open market operations moved the overnight rate.
Large-scale asset purchases left the system with abundant reserves, so scarcity no longer sets the rate and administered rates do the work instead.
Under this arrangement the quantity of reserves and the level of interest rates became separate policy questions rather than two aspects of one lever.
Reserves are not lendable funds
A common misconception treats reserves as a stock of money waiting to be lent to customers, which misdescribes the mechanism.
Banks lend by creating deposits, constrained by capital, regulation and the availability of creditworthy borrowers rather than by a pile of reserves on hand.
Reserves matter afterward, when the borrower spends the money and the payment has to settle with another institution, which is where the balance is actually used.