Your thoughts about excess reserves?

In summary, excess reserves are funds that banks hold in excess of their required reserves as a safety net for unexpected withdrawals. These reserves also help banks maintain liquidity and protect against financial risks. They can have both positive and negative effects on the economy and are influenced by monetary policy, economic conditions, and regulations. Excess reserves can be used for lending, but banks typically only lend out a portion of them due to the need for maintaining liquidity and managing risk.
  • #1
Posty McPostface
27
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Chart:

fredgraph.png

Source.

So, inflation has been low, which has been troubling economists and the FED over the effectiveness of undertaken Quantitive Easing (QE).

What's the cause of this, and are banks holding onto excess reserves the real issue here? What are your thoughts about all this liquidity in bank reserves?
 

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  • #2
Posty McPostface said:
What's the cause of this

Banks didn't get interest on this until 2008. Before then, they had no reason to keep any. This is not something esoteric - any internet search will bring this up.
 
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What are excess reserves?

Excess reserves are the funds that a bank holds in excess of its required reserves. These funds are typically held in the bank's account at the central bank and are considered a safety net for the bank in case of unexpected withdrawals or other financial obligations.

Why do banks hold excess reserves?

Banks hold excess reserves as a precautionary measure to maintain liquidity and protect against potential financial risks. These reserves also enable banks to quickly meet any unexpected demands for withdrawals from customers.

How do excess reserves affect the economy?

Excess reserves can have both positive and negative effects on the economy. On one hand, they can help stabilize the financial system and prevent bank runs. On the other hand, excess reserves can also lead to lower interest rates, which can encourage excessive risk-taking and potentially contribute to inflation.

What factors influence the level of excess reserves?

The level of excess reserves is influenced by several factors, including monetary policy decisions made by the central bank, economic conditions, and the demand for loans. Additionally, regulations and capital requirements for banks may also impact the level of excess reserves held.

Can excess reserves be used for lending?

Yes, excess reserves can be used for lending. However, banks typically only lend out a portion of their excess reserves, as they also need to maintain a certain level of liquidity to meet their financial obligations. The decision to lend out excess reserves is influenced by various factors, such as the demand for loans and the bank's risk appetite.

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