Understanding the Accumulation of Bank and Thrift Reserves During the U.S. Financial Crisis

FRB of St. Louis Working Paper No. 2013-029C

68 Pages Posted: 20 Oct 2013 Last revised: 13 Feb 2014

See all articles by Su-Hsin Chang

Su-Hsin Chang

Washington University in St. Louis - Division of Public Health Sciences

Silvio Contessi

Monash Business School - Department of Banking and Finance; Financial Research Network (FIRN)

Johanna Francis

Fordham University

Date Written: February 10, 2014

Abstract

The level of aggregate excess reserves held by U.S. depository institutions increased significantly at the peak of the 2007-09 financial crisis. Although the amount of aggregate reserves is determined almost entirely by the policy initiatives of the central bank that act on the asset side of its balance sheet, the motivations of individual banks in accumulating reserves differ and respond to the impact of changes in the economic environment on individual institutions. We undertake a systematic analysis of this massive accumulation of excess reserves using bank-level data for more than 7,000 commercial banks and almost 1,000 savings institutions during the U.S. financial crisis. We propose a testable stochastic model of reserves determination when interest is paid on reserves, which we estimate using bank-level data and censored regression methods. We find evidence primarily of a precautionary motive for reserves accumulation with some notable heterogeneity in the response of reserves accumulation to external and internal factors of the largest banks compared with smaller banks. We combine propensity score matching and a difference-in-differences approach to determine whether the beneficiaries of the Capital Purchase Program of the Troubled Asset Relief Program accumulated less cash, including reserves, than non-beneficiaries. Contrary to anecdotal evidence, we find that banks that participated in the program accumulated less cash, including reserves, than nonparticipants in the initial quarters after the capital injection.

Keywords: Commercial Banks, Financial Crisis, Excess Reserves, TARP

JEL Classification: E44, E51, G21

Suggested Citation

Chang, Su-Hsin and Contessi, Silvio and Francis, Johanna, Understanding the Accumulation of Bank and Thrift Reserves During the U.S. Financial Crisis (February 10, 2014). FRB of St. Louis Working Paper No. 2013-029C, Available at SSRN: https://ssrn.com/abstract=2341728 or http://dx.doi.org/10.2139/ssrn.2341728

Su-Hsin Chang

Washington University in St. Louis - Division of Public Health Sciences ( email )

660 S. Euclid Avenue
Campus Box 8100
St. Louis, MO 63110
United States

Silvio Contessi (Contact Author)

Monash Business School - Department of Banking and Finance ( email )

P.O. Box 197
Caulfield East, 3145
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Johanna Francis

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

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