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 ?
primarily by adjusting the interest rate it pays on excess reserve balances.
Excess Reserve Holdings by Region Domestic European- Non-European Total Excess Banks Owned Banks Foreign-Owned Banks Reserves 2014:Q1 1.
In estimating that demand, the Desk must take account of the demand for the three types of balances held by depository institutions at the Federal Reserve--required reserve balances, contractual clearing balances, and excess reserve balances.
The textbook model of excess reserve demand assumes that this uncertainty increases proportionately with the level of transactions deposits.
Thus, excess reserves (as a signal) change less with bank quality, and signaling for the entire cross-section of banks may be possible even with truncated feasible excess reserve values.
Continued transfers will drain excess reserve accounts and continue the trend of increased risk-to-capital ratios as more commitments are made.
In October 2008, the Fed announced that it would begin to pay interest on depository institutions' required and excess reserve balances, having been given authority by Congress.
At a five percent reserve requirement, a one-million dollar excess reserve allows a bank to extend twenty million dollars in new credits.
The authorization to pay interest on excess reserve balances could be a useful addition to monetary policy, Kohn emphasized.
Depository institutions earn no interest on their vault cash, required reserve balances, or excess reserve balances.
The state's ability to redirect MIF's excess reserve funds to its general fund account is an ongoing credit concern.
The Fed now pays interest on required and excess reserve balances, having been granted the authority by Congress and putting the policy into place ahead of schedule so that it could be used to help address the financial crisis.