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 operation offered seven-day term deposits with the rate set equal to the sum of the interest rate paid on excess reserves plus a fixed spread of 1 basis point.
Shelton said that the apex bank needs to gradually end its policy of paying interest on excess reserves (IOER).
Judy Shelton, a potential Fed nominee, is opposed to the current Fed practice of paying banks interest on excess reserves, IOER.
While the village recently has put half its excess reserves toward future capital projects in general and the other half toward savings for a potential performing arts center in particular, Dailly said he would like to see a $2 million more of reserves spent on road repairs for the next few years.
While the Fed's balance sheet and banks' excess reserves are down $440 billion and $1.1 trillion from their peak, respectively, excess reserves are still very high at $1.6 trillion.
The government and the RBI have been locked in a tussle over various issues, including transfer of excess reserves of the central bank.
With each dollar worth of bonds it has let run off, the so-called excess reserves it requires private banks to hold have become more scarce.
In the same vein, the interest rate on the excess reserves witnessed a remarkable increase between November 2015 and March 2018.
Since 2008, however, the Fed has paid interest on excess reserves (IOER) equal to or even higher than the effective federal funds rate.
The second reason is, as interest rates normalize, if the BOJ interest on "excess reserves" at the BOJ from private banks is to be restrained rather than brought up to an adequate level in comparison to the market rate, then from the perspective of an integrated government of the government sector and BOJ, it is in fact the same as imposing deposit taxation.
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.
In the first instance, we analyse existing loan-loss reserve coverage across GCC banking sectors to determine the extent to which excess reserves could be used to cover unexpected losses.