Excess Reserves

What Are Excess Reserves?

Banks keep part of their deposits as reserves: cash in their own vaults or balances held at the central bank. Regulators may require a minimum level, known as the reserve requirement. Any amount a bank holds beyond that minimum is called excess reserves.

How They Work

Excess reserves are the difference between total reserves and required reserves:

Excess Reserves = Total Reserves − Required Reserves

A bank with excess reserves can lend the surplus, invest it, or keep it on deposit at the central bank. Because banks are not forced to lend out every dollar they hold, the level of excess reserves affects how much new credit moves through the economy.

Why They Change

Central banks influence excess reserves through monetary policy and quantitative easing. When a central bank buys securities, it credits banks' reserve accounts, which can raise excess reserves sharply. In the United States, excess reserves rose dramatically after the 2008 financial crisis as the Federal Reserve expanded its asset purchases. Many central banks also pay interest on reserves, giving banks a return for holding cash at the central bank, which can encourage them to keep balances above the minimum.

Why It Matters to Investors

Excess reserves offer a view of banking-system liquidity and how willing banks are to lend. High levels can signal caution or abundant liquidity, while low levels can indicate tighter conditions. Investors often watch these figures alongside money supply data and central bank announcements. The link between reserves and lending is not always direct, however, and reserves alone do not determine inflation or economic growth.