Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late '90s

29 Pages Posted: 19 Dec 2004

See all articles by Kazuo Ogawa

Kazuo Ogawa

Osaka University - Institute of Social and Economic Research (ISER)

Date Written: December 2004

Abstract

We investigated, empirically, why Japanese banks held excess reserves in the late 1990s. Specifically, we pin down two factors explaining the demand for excess reserves: a low short-term interest rate, or call rate, and the fragile financial health of banks. The virtually zero call rate increased the demand for excess reserves substantially, and a high bad loans ratio largely contributed to the increase in excess reserve holdings. We found that the holdings of excess reserves would fall by half if the call rate were to be raised to its level prior to the adoption of the zero-interest-rate policy, and the bad loans ratio were to fall by 50%.

Keywords: Excess Reserve, Bad loans, Zero-interest-rate-policy

JEL Classification: E42, E51, E52, G21

Suggested Citation

Ogawa, Kazuo, Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late '90s (December 2004). Available at SSRN: https://ssrn.com/abstract=634563 or http://dx.doi.org/10.2139/ssrn.634563

Kazuo Ogawa (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

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Ibaraki, Osaka 567-0047
Japan
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