Why are Banks Holding so Many Excess Reserves?

10 Pages Posted: 28 Jan 2010

See all articles by Todd Keister

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

James McAndrews

Wharton Financial Institutions Center

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Date Written: December 1, 2009

Abstract

The buildup of reserves in the U.S. banking system during the financial crisis has fueled concerns that the Federal Reserve’s policies may have failed to stimulate the flow of credit in the economy: Banks, it appears, are amassing funds rather than lending them out. However, a careful examination of the balance sheet effects of central bank actions shows that the high level of reserves is simply a by-product of the Fed’s new lending facilities and asset purchase programs. The total quantity of reserves in the banking system reflects the scale of the Fed’s policy initiatives, but conveys no information about the initiatives’ effects on bank lending or on the economy more broadly.

Keywords: bank reserves, money multiplier

JEL Classification: E51, E58, G21

Suggested Citation

Keister, Todd and McAndrews, James, Why are Banks Holding so Many Excess Reserves? (December 1, 2009). Current Issues in Economics and Finance, Vol. 15, No. 8, December 2009, Available at SSRN: https://ssrn.com/abstract=1543348 or http://dx.doi.org/10.2139/ssrn.1543348

Todd Keister (Contact Author)

Rutgers, The State University of New Jersey - Department of Economics ( email )

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HOME PAGE: http://econweb.rutgers.edu/tkeister

James McAndrews

Wharton Financial Institutions Center ( email )

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