It is easy to see that the higher the reserve ratio, the smaller the risk of a bank run.
With a ratio of 100% this means that even if every single customer demanded to take out their money, the bank will have it all available.
The greater the reserve requirement, the less money that a bank can potentially lend—but this excess cash also staves off a banking failure and shores up its balance sheet.
Still, when the reserve ratio increases, it is considered contractionary monetary policy, and when it decreases, expansionary.
Learn more about bank reserves here:
