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 ?
This really had attracted the banks interests providing the possibility for the banks to place their excess reserve in short term asset.
In the two years since QE3 ended, along with excess reserve growth, bank credit has accelerated to a 7.
In circumstances of excess reserve abundance, it isn't clear that raising the fed funds rate, assuming it can be done just by raising the IOER rate, would be relevant at the margin for broader credit market conditions.
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.
Maintaining excess reserve balances and paying higher rates of interest do not appear to be viable long-term strategies for the Fed.
Consequently, rates in the federal funds market would be expected to be greater than or equal to the rate paid on excess reserve balances.
Since the FOMC has relinquished control of excess reserve changes, it is incapable of restricting the deposit creation process (and any indirect effects that this might have on currency demand).
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.
Where the central bank pays interest on excess reserves at rates in excess of the discount rate, commercial banks have an incentive to finance large excess reserve positions with discount borrowings.
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.