Ueberschussreserven

What Is Ueberschussreserven?

Ueberschussreserven, also known as excess reserves, are the capital reserves held by a commercial bank or other financial institution above the minimum amount required by a central bank or regulatory authority. These reserves are a key component within the realm of monetary policy and central banking, reflecting a bank's willingness or necessity to hold more liquidity than strictly mandated. Historically, commercial banks aimed to minimize excess reserves to maximize their lending capacity and profitability. However, especially since the 2008 global financial crisis, the volume and role of Ueberschussreserven have significantly changed, becoming an important tool for central banks to influence market conditions.

History and Origin

The concept of banks holding reserves has a long history in the U.S., with state laws requiring reserves as early as the 1800s following financial instability. Prior to the 21st century, commercial banks generally maintained minimal Ueberschussreserven, often close to zero, because these balances did not earn interest and represented an opportunity cost in terms of foregone lending. The landscape for Ueberschussreserven dramatically shifted with the Financial Services Regulatory Relief Act of 2006, which authorized the Federal Reserve to pay interest on reserves held by depository institutions. This authority's effective date was accelerated to October 1, 2008, by the Emergency Economic Stabilization Act of 2008, coinciding with the deepening of the Great Recession.⁵ This change incentivized banks to hold reserves, marking a pivotal moment in the history of excess reserves. The subsequent implementation of large-scale asset purchase programs, known as quantitative easing, further swelled banks' reserve balances, moving the banking system into an environment of ample reserves.

Key Takeaways

• Ueberschussreserven are bank reserves held above the minimum required by regulators.
• Historically minimal, their volume significantly increased post-2008 due to new central bank policies like interest on reserves and quantitative easing.
• Central banks use the interest paid on Ueberschussreserven as a tool to influence short-term interest rates and manage the money supply.
• High levels of Ueberschussreserven can indicate banks are holding onto funds rather than lending them out, potentially impacting economic activity.

Formula and Calculation

The calculation of Ueberschussreserven is straightforward: it is the difference between a bank's total reserves and its required reserves.

Where:

• Total Reserves refers to the sum of a bank's vault cash and its deposits held at the central bank.
• Required Reserves are the minimum amount of reserves that a commercial bank is mandated to hold by regulatory authorities, typically a percentage of its eligible deposits, known as reserve requirements. As of March 2020, the Federal Reserve set reserve requirements to zero for all depository institutions, meaning most bank reserves now effectively function as excess reserves.

Interpreting the Ueberschussreserven

The level of Ueberschussreserven held by banks can offer insights into the overall financial system and the effectiveness of monetary policy. When banks hold significant Ueberschussreserven, it can indicate a few things:

• Ample Liquidity: Banks have abundant funds readily available, beyond what is immediately needed for daily operations or regulatory compliance.
• Monetary Policy Stance: Central banks can influence the amount of Ueberschussreserven by adjusting their administered rates, such as the interest on reserve balances. A higher rate encourages banks to hold more reserves, while a lower rate might incentivize more lending. This tool helps central banks manage the federal funds rate.⁴
• Lending Environment: While high excess reserves might suggest banks are well-capitalized, they don't automatically translate into increased lending to businesses and consumers. Other factors, such as loan demand, economic outlook, and regulatory considerations, also play a significant role.

Hypothetical Example

Consider "Bank Alpha," a hypothetical commercial bank. Before March 2020, suppose Bank Alpha had total deposits of $100 million. If the central bank imposed a 10% reserve requirement, Bank Alpha would be required to hold $10 million in reserves. If Bank Alpha actually held $12 million in total reserves (combining vault cash and deposits at the central bank), then its Ueberschussreserven would be:

In this scenario, Bank Alpha has $2 million in Ueberschussreserven, meaning it holds $2 million more than the regulatory minimum. This excess could be lent out, invested, or held to provide additional financial buffers. If the central bank paid interest on these Ueberschussreserven, Bank Alpha would earn income on the $2 million held above the requirement.

Practical Applications

Ueberschussreserven play a crucial role in modern central banking and financial markets, particularly since the 2008 financial crisis. Central banks, like the Federal Reserve, use the interest paid on Ueberschussreserven as a primary tool for implementing monetary policy. By adjusting the interest rate on reserve balances, central banks can influence short-term market rates, guiding the effective federal funds rate into their target range. This mechanism allows for effective control over the stance of monetary policy even when the banking system is flush with reserves, a condition often resulting from programs like quantitative easing.³

Beyond influencing interest rates, Ueberschussreserven also enhance the overall balance sheet strength of financial institutions. Holding a greater buffer of liquid assets provides banks with increased resilience against unexpected withdrawals or market shocks, contributing to financial stability.

Limitations and Criticisms

While Ueberschussreserven provide central banks with a powerful tool for monetary policy implementation, particularly in environments of ample reserves, there are also limitations and criticisms associated with them. One significant critique, particularly in the aftermath of large-scale asset purchases, questioned why central banks did not simply lower the interest paid on Ueberschussreserven to encourage more bank lending into the real economy, rather than relying solely on quantitative easing.² Some economists argue that persistently high levels of Ueberschussreserven, even with interest paid, could signal a "liquidity trap," where additional liquidity injections by the central bank do not effectively stimulate lending or economic activity.

Another concern revolves around the potential for future inflation. While large excess reserves have not directly led to high inflation in the past, some critics suggest that if these reserves were suddenly converted into widespread lending, it could significantly expand the money supply and trigger inflationary pressures.¹ Furthermore, the policy of paying interest on reserves has been debated regarding its impact on bank profitability and its role in potentially increasing banks' reliance on central bank facilities.

Ueberschussreserven vs. Required Reserves

Ueberschussreserven (excess reserves) and Required Reserves are both components of a bank's total reserves held at the central bank or as vault cash, but they serve distinct purposes. Required reserves are the legally mandated minimum amount of funds that a bank must hold against its customer deposits. This requirement is a regulatory tool designed to ensure a basic level of bank liquidity and control the overall money supply. Historically, banks always aimed to meet this requirement precisely.

In contrast, Ueberschussreserven are any funds held by a bank above these regulatory requirements. Prior to the 2008 financial crisis, banks typically minimized their excess reserves due to the opportunity cost of holding non-interest-bearing assets. However, with the advent of interest on reserves and quantitative easing, Ueberschussreserven became a significant feature of the banking system. The key difference lies in their nature: required reserves are compulsory, while Ueberschussreserven are voluntary holdings (though influenced by central bank incentives) that offer banks additional liquidity and, potentially, interest income.

FAQs

What happens if a bank has negative Ueberschussreserven?

A bank cannot have negative Ueberschussreserven in the traditional sense. If a bank's total reserves fall below its required reserves, it faces a reserve deficiency. In such a situation, the bank must take action to meet its requirement, such as borrowing from other banks in the federal funds market or from the central bank's discount window. Failure to meet reserve requirements can result in penalties from the regulatory authority.

Do banks earn interest on Ueberschussreserven?

Yes, in many major economies, including the United States, central banks pay interest on Ueberschussreserven. This policy was introduced to provide central banks with a new tool for managing short-term interest rates in an environment of abundant bank reserves, which became prevalent after large-scale asset purchases. The interest rate paid incentivizes banks to hold these funds rather than lending them out at lower rates, helping to establish a floor for overnight interbank lending rates.

How do Ueberschussreserven relate to the money supply?

Ueberschussreserven represent potential rather than actual additions to the broader money supply. When banks hold large Ueberschussreserven, it means they have the capacity to expand lending. If these excess funds are lent out, they can lead to an increase in deposits throughout the banking system, thereby expanding the money supply through the money multiplier effect. However, if banks choose to hold onto their Ueberschussreserven, or if there is insufficient loan demand, this potential may not be fully realized, meaning the increase in the monetary base does not necessarily translate into a proportionate increase in the broader money supply.

Are Ueberschussreserven a sign of a strong or weak economy?

The interpretation of Ueberschussreserven depends heavily on the economic context and central bank policies. Historically, large excess reserves might have indicated weak loan demand or bank caution during an economic downturn. However, in the post-2008 era, high Ueberschussreserven are largely a result of central bank actions like quantitative easing and the payment of interest on reserves, which are often implemented to stimulate a weak economy or maintain financial stability. Therefore, high Ueberschussreserven in a modern context primarily reflect the current monetary policy framework rather than solely indicating economic strength or weakness.