Reserveueberschuss

What Is Reserveueberschuss?

Reserveueberschuss, more commonly known as excess reserves, refers to the capital reserves held by a bank or financial institution over and above the amount mandated by its central bank or regulatory authority. These reserves are typically held at the central bank itself or as vault cash. In the realm of monetary policy and banking, excess reserves play a significant role in influencing the liquidity of the financial system and the central bank's control over interest rates.

History and Origin

Historically, commercial banks held minimal excess reserves, as these balances typically earned no interest and represented an opportunity cost in terms of foregone lending or investment income. The paradigm shifted significantly with the global financial crisis of 2008. In the United States, for instance, the Federal Reserve gained the authority to pay interest on reserve balances through the Financial Services Regulatory Relief Act of 2006, with implementation initially set for October 2011. However, the Emergency Economic Stabilization Act of 2008 accelerated this effective date to October 1, 2008, enabling the Federal Reserve to begin paying interest on both required and excess reserves¹⁴, ¹⁵. This measure was intended to provide the Federal Reserve with another tool to manage the Federal Funds Rate and support financial stability during a period of intense crisis and substantial quantitative easing. Many economists had long advocated for the payment of interest on reserves to eliminate the implicit tax that reserve requirements imposed on banks¹³.

Key Takeaways

• Excess reserves are funds held by banks beyond their regulatory required reserves.
• Historically, banks minimized excess reserves due to foregone income, but this changed with the introduction of interest payments on reserves by central banks.
• Central banks can influence the amount of excess reserves in the banking system through various monetary policy tools, affecting overall liquidity.
• Large volumes of excess reserves can impact the transmission mechanism of monetary policy, particularly concerning lending and money market rates.
• As of March 2020, the Federal Reserve eliminated all reserve requirements for U.S. depository institutions, meaning all reserves held at the Fed are now technically excess reserves¹¹, ¹².

Formula and Calculation

Conceptually, excess reserves are calculated as the difference between a bank's total reserves and its required reserves.

Total Reserves = Vault Cash + Balances at Central Bank

Excess Reserves = Total Reserves - Required Reserves

Where:

• Total Reserves represents the sum of physical currency held by the bank (vault cash) and the balance it maintains at the central bank.
• Required Reserves is the minimum amount of reserves a bank is mandated to hold against its deposit liabilities, as stipulated by the central bank. This is typically a percentage of certain types of deposits.

For example, if a bank has $100 million in total reserves and its required reserves are $10 million, its excess reserves would be $90 million. It is important to note that many central banks, including the U.S. Federal Reserve since March 2020, have set reserve requirements to zero, meaning all reserves held by commercial banks at the central bank are effectively excess reserves⁹, ¹⁰.

Interpreting the Reserveueberschuss

The level of a bank's reserveueberschuss (excess reserves) provides insights into its liquidity position and its potential for lending. When banks hold large amounts of excess reserves, it generally indicates an abundant supply of liquidity within the financial system. Before central banks began paying interest on these balances, high excess reserves might suggest weak loan demand or increased risk aversion among banks.

In a regime where interest is paid on excess reserves, such as in many major economies post-2008, the interpretation changes. Banks may choose to hold significant excess reserves if the interest rate paid on them is attractive relative to other safe, short-term investments, or if they face a high degree of uncertainty. These reserves serve as a buffer, ensuring banks can meet unexpected withdrawals or cover interbank obligations without resorting to costly borrowing. For central banks, the level of excess reserves influences the effectiveness of their monetary policy tools in steering short-term interest rates.

Hypothetical Example

Consider "Alpha Bank," a hypothetical commercial bank. Before March 2020, the central bank mandated a 10% reserve requirement on all demand deposits. If Alpha Bank held $500 million in demand deposits, its required reserves would be $50 million (10% of $500 million).

Now, assume Alpha Bank's actual reserve holdings at the central bank are $120 million.
Using the formula:
Excess Reserves = Total Reserves - Required Reserves
Excess Reserves = $120 million - $50 million = $70 million

In this scenario, Alpha Bank has $70 million in excess reserves. These funds are above what is legally required and could be used for additional lending, investing in securities, or maintaining a buffer for unexpected needs.

However, after March 2020, if the central bank eliminated the reserve requirement, Alpha Bank's required reserves would drop to $0. In this new scenario, its entire $120 million in reserves held at the central bank would be classified as excess reserves. The bank would continue to earn interest on these balances, influencing its decision to hold or deploy them.

Practical Applications

Excess reserves are a crucial component in the operational framework of modern monetary policy. Central banks utilize the remuneration of excess reserves to manage the money supply and influence short-term interest rates. For example, by adjusting the interest rate paid on reserveueberschuss, a central bank can set a floor for the overnight interbank rate, as banks would be unwilling to lend to other institutions at a rate lower than what they can earn by simply holding funds at the central bank.

During periods of financial crisis or economic downturns, central banks often inject massive liquidity into the financial system through programs like quantitative easing (QE). This leads to a significant increase in excess reserves held by commercial banks. For instance, after the 2008 financial crisis and the COVID-19 pandemic, many central banks saw a surge in excess reserves as a result of their large-scale asset purchases. In the Euro area, for example, the European Central Bank's (ECB) 2022 rate hiking cycle demonstrated how large excess reserves can affect monetary policy transmission, with banks holding more excess reserves showing a relative increase in their credit supply following rate hikes⁸.

Limitations and Criticisms

While excess reserves provide a critical buffer for commercial banks and a tool for central bank policy, there are limitations and criticisms associated with their widespread existence, particularly in an "ample reserves" regime where reserve requirements are low or zero.

One key concern is the potential impact on the transmission of monetary policy. When excess reserves are abundant, the traditional link between central bank open market operations and the Federal Funds Rate can weaken. Instead, the interest rate paid on excess reserves becomes the primary lever for guiding short-term market rates, leading to what is sometimes called a "floor system"⁷. This might reduce market activity in the interbank lending market.

Another criticism, particularly relevant when central banks pay interest rates on reserveueberschuss, is the cost incurred by the central bank, which can reduce its remittances to the government. This effectively transfers income from the central bank to commercial banks. Some argue that large excess reserves, especially when interest is paid on them, can create a disincentive for banks to engage in productive lending if holding reserves offers a comfortable, risk-free return⁵, ⁶. This could potentially slow down economic growth by reducing the velocity of money. An IMF working paper highlights that large excess reserves can lead to situations where short-term rates become "unanchored" and more volatile within the central bank's interest rate corridor, possibly due to coordination failures among market participants⁴.

Reserveueberschuss vs. Required Reserves

The terms excess reserves (Reserveueberschuss) and required reserves are closely related but represent distinct components of a bank's total reserves.

The primary point of confusion often arises because, in an "ample reserves" regime, where central banks have conducted large-scale asset purchases (like quantitative easing), the amount of excess reserves can be vastly larger than required reserves, to the point where required reserves may even be eliminated as a policy tool.

FAQs

Why do banks hold Reserveueberschuss if they could lend it out?

Banks hold excess reserves for several reasons. Primarily, they do so to maintain adequate liquidity to meet unexpected withdrawals or payments, manage daily cash flows, and ensure they can settle transactions with other banks. Additionally, if the central bank pays interest on these reserves, it provides a risk-free return, making holding excess reserves an attractive option, especially when lending opportunities are scarce or perceived as risky.

How does the central bank influence Reserveueberschuss?

The central bank influences excess reserves primarily through its monetary policy operations. Measures like open market operations (buying or selling government securities) directly increase or decrease the reserves in the banking system. When the central bank buys securities, it pays by crediting banks' reserve accounts, increasing their total and thus excess reserves. Conversely, selling securities reduces reserves. Changes to the required reserves ratio also directly impact excess reserves, though many major central banks have reduced or eliminated reserve requirements in recent years.

What is the impact of large Reserveueberschuss on the economy?

Large volumes of excess reserves can indicate a highly liquid banking system, which might facilitate lending and support economic growth if banks are willing to deploy those funds. However, if banks choose to hold onto them, even with interest payments, it can reflect a lack of demand for credit or risk aversion, potentially dampening economic activity. It also alters how monetary policy is conducted, shifting the central bank's primary tool for managing short-term interest rates from traditional open market operations to the rate paid on reserves.