excess reserves


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Excess reserves

Actual reserves that exceed required reserves.

Excess Reserves

Money a bank keeps in addition to the legally required reserves. Historically, most banks have kept little or nothing in excess reserves because they earn no interest on excess reserves. Government policies such as FDIC deposit insurance encouraged keeping less in reserves because banks were not required to cover all withdrawals in the event of a run. However, in the United States, the Emergency Economic Stabilization Act of 2008 allowed the Federal Reserve to pay interest on excess reserves, which is began doing in October 2008. In the ensuing months, the amount of excess reserves in American banks increased substantially. This is thought to have reduced insolvency risk for banks by encouraging them to keep more money on hand, but critics contend that this discourages banks from lending.

excess reserves

The reserves held by banks and thrifts in excess of what is required by the Federal Reserve. Large excess reserves indicate a potential for credit expansion and reduced interest rates that could prove beneficial to the security markets. Conversely, small excess reserves indicate reduced possibilities for credit expansion and a relatively tight monetary policy by the Federal Reserve. Compare required reserves.
References in periodicals archive ?
The resolution of this puzzle is the shift of the Fed to a focus on its own credit creation, which it largely sterilized using sizeable above-market and questionable subsidies to banks for holding excess reserves, with the indirect result that money often has grown at a recessionary pace despite the explosion of Fed credit.
1 percent negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.
63 billion, while the volume of excess reserves, including overnight window deposits held at bank reached JD2.
1 trillion) are accounted for by the growth in required reserves accompanying growth in commercial bank deposits held by the public; the bulk are voluntarily held as excess reserves (balances over and above legally required reserves against deposits).
In the US, quantitative easing did not boost consumption and investment partly because most of the additional liquidity returned to central banks' coffers in the form of excess reserves.
It then shows that the quantity theory of money has not really been put to the test after the Great Recession, because a sharp increase in banks' excess reserves and corresponding sharp decline in the 'money multiplier' has meant that the rise in the Federal Reserve's balance sheet has not translated into increased money available to the public in the usual fashion.
Consequently, banks have taken the large injections of liquidity from the Federal Reserve and held them as interest-bearing excess reserves, which are the reserves held by banks over the required amount.
Therefore, in Expansion Stage 1 (see Table A below), the $10,000 would be reduced by $1,000, leaving $9,000 as free capital or excess reserves.
banks holding the liquidity being pumped into the economy by the Federal Reserve as excess reserves instead of making more loans?
Before we attempt to forecast future Federal Reserve policy, we need to examine the history of the Fed and how the financial crisis created some never-before-used policies such as paying interest on excess reserves.
The Federal Reserve has once again started the debate on reducing interest paid to banks on excess reserves.
The Central Bank of Jordan CBJ announced 22 November that the volume of excess reserves on is JOD 1.