Published Mar 5, 2023 Excess reserves refer to the amount of funds that a bank holds beyond the required level. The required reserve is the minimum amount of funds a bank must hold in order to meet its regulatory obligations. If a bank holds more than the required level, the excess is considered to be its excess reserves. Let’s suppose Bank X has USD 100 million in deposits, and the required reserve ratio is 10%. In that case, the bank must hold USD 10 million in required reserves. However, let’s say that Bank X holds USD 20 million in reserves, leaving USD 10 million as excess reserves. The bank could use these excess reserves to lend to potential borrowers, invest in other financial institutions, or simply hold on to them as a safety net. Excess reserves have significant implications for the economy. Banks could use them to extend more loans, which stimulates economic growth. An increase in the money supply causes interest rates to fall, which in turn increases demand for goods and services. However, a decrease in the money supply may also reduce inflationary pressures, especially during times of high inflation. Therefore, the level of excess reserves that a bank holds can have a substantial impact on the overall economy. Additionally, excess reserves can also serve as a buffer for banks during times of financial stress, helping them to avoid potential liquidity problems.Definition of Excess Reserves
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Why Excess Reserves Matters
Macroeconomics