[jmherbener]

The Fed regulates commercial banks. One of its regulations concerns reserves banks hold against their deposits. The Fed requires a bank to hold roughly 10 percent of the total that all of the bank’s customers have in their checking accounts at the bank. The Fed also dictates that banks can hold as reserves either Federal Reserve Notes (or currency) or checking account balances at the Fed.

Markets clear at the price at which the quantity of the good that buyers want to buy is the same as the quantity of the good that sellers want to sell. At higher prices there would be excess supply and at lower prices there would be excess demand. So each type of loan has an interest rate that clears the market, at which the quantity of credit borrowers want to borrow is the same as the quantity of credit lenders want to lend.