Bank Lending and Interest on Excess Reserves

54 Pages Posted: 13 Feb 2018

See all articles by Thomas L. Hogan

Thomas L. Hogan

Rice University - Baker Institute for Public Policy

Date Written: February 6, 2018

Abstract

This paper analyzes the relationship between bank lending and the Federal Reserve's policy of paying interest on excess reserves (IOER). We argue that the Fed's IOER policy deviates from the standard interest-rate floor framework in ways that influence banks' incentives to hold loans and reserves. Using quarterly data from the start of 2000 through the third quarter of 2017, we find that banks' holdings of loans and reserves are related to GDP growth and employment but are not related to measures of loan demand or economic uncertainty. Accounting for these factors, banks' loan holdings are inversely related to both the rate of IOER and to its premium above short-term market interest rates. We estimate that the Fed's IOER policy accounts for more than half of the post-crisis decline in bank loan allocations.

Keywords: Federal Reserve, Banks, Lending, Reserves; IOER, Monetary policy

JEL Classification: E51, E52, E58, E44, E47

Suggested Citation

Hogan, Thomas L., Bank Lending and Interest on Excess Reserves (February 6, 2018). Available at SSRN: https://ssrn.com/abstract=3118462 or http://dx.doi.org/10.2139/ssrn.3118462

Thomas L. Hogan (Contact Author)

Rice University - Baker Institute for Public Policy ( email )

6100 Main Street, MS-40
Houston, TX 77005
United States

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