Imposing some positive minimum reserve requirements for private banks provides some constraint on their credit creation activities.
Answer: False
The answer is False.
While many nations do not have minimum reserve requirements other than reserve account balances at the central bank have to remain non-zero, other nations do persist in these gold standard artefacts. The ability of banks to expand credit is unchanged across either type of country.
These sorts of "restrictions" were put in place to manage the liabilities side of the bank balance sheet in the belief that this would limit volume of credit issued.
It became apparent that in a fiat monetary system, the central bank cannot directly influence the growth of the money supply with or without positive reserve requirements and still ensure the financial system is stable.
The reality is that every central bank stands ready to provide reserves on demand to the commercial banking sector. Accordingly, the central bank effectively cannot control the reserves that are demanded but it can set the price.
However, given that monetary policy (mostly ignoring the current quantitative easing type initiatives) is conducted via the central bank setting a target overnight interest rate the central bank is really required to provide the reserves on demand at that target rate. If it doesn't then it loses the ability to ensure that target rate is sustained each day.
Imagine the central bank tried to lend reserves to banks above the target rate. Immediately, banks with surplus reserves could lend above the target rate and below the rate the central bank was trying to lend at. This would lead to competitive pressures which would drive the overnight rate upwards and the central bank loses control of its monetary policy stance.
Every central bank conducts its liquidity management activities which allow it to maintain control of the target rate and therefore monetary policy with the knowledge of what the likely reserve demands of the banks will be each day. They take these factors into account when they employ repo lending or open market operations on a daily basis to manage the cash system and ensure they reach their desired target rate.
The details vary across countries (given different institutional arrangements relating to timing etc) but the operations are universal to central banking.
While admitting that the central bank will always provide reserves to the banks on demand, some will still try argue that by the capacity of the central bank to set the price of the reserves they provide ensures it can stifle bank lending by hiking the price it provides the reserves at.
The reality of central bank operations around the world is that this doesn't happen. Central banks always provide the reserves at the target rate.
So as I have described often, commercial banks lend to credit-worthy customers and create deposits in the process. This is an on-going process throughout each day. A separate area in the bank manages its reserve position and deals with the central bank.
The two sections of the bank do not interact in any formal way so the reserve management section never tells the loan department to stop lending because they don't have reserves. The banks know they can get the reserves from the central bank in whatever volume they need to satisfy any conditions imposed by the central bank at the overnight rate (allowing for small variations from day to day around this).
If the central bank didn't do this then it would risk failure of the financial system.
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