stonebluff

Why Are Banks Holding So Many Excess Reserves?

I spent years as bank counsel and a director of banks. I see nothing sinister in the increase in reserves, which are mostly deposits by member banks of the federal reserve system at the Fed. There is no "excess" of reserves; the reference is to reserves above the amounts required by Fed regulation.. The Fed does have the power to raise and lower reserve requirements; raising reserve requirements takes lendable funds out of the system, lowering them makes more funds available. I don't know what the current required reserve level is, but it's not high. The whole country wants the banks to lend that money when a decent credit shows up.Maintaining reserves above the reserve requirements reflects partly the fact that the Fed now pays interest on reserves, as several people have noted above, but mostly the fear in the hearts of bankers-fear that any new loans they might make will go bad, and fear of unseen and perhaps unseeable losses in all types of current credit. The poor devils are displaying
that prudence that many of them have not shown in recent times.