The main purpose of the study was to identify the effect of reserve requirement on performance of commercial banks in Ethiopia generally and identify its effect on commercial banks performance in terms of profitability, lending capacity and cost intermediation specifically. To achieve this objective, the researcher used quantitative research approach and explanatory research design. Balanced panel random effect regression model was used for seven commercial banks from period 2000 to 2018. Purposive sampling technique was used to select seven commercial banks from the total. The study used both macro and bank specific variable as a control variable together with reserve requirement. ROA, LOA, NIM taken as a measure of banks performance while reserve requirement was taken as independent variable. OLS technique was used to estimate parameters of the model. The result of the panel regression model showed that reserve requirement has negative and statistically significant effect on all three models ROA, LOA and NIM. The researcher concludes that reserve requirement has significant and negative effect on performance of commercial banks in Ethiopia. Hence, the researcher suggests that NBE should consider impact of reserve requirement and balance the benefits and costs on commercial banks performance to set reserve requirement rate and shall allow return on reserve. Commercial banks should emphasis on changes of reserve requirement by NBE to comply with NBE regulation and to adjust their way operations and improve performance accordingly.