Ueberschussreserven, also known as excess reserves, are funds held by financial institutions at a central bank that exceed the amount required by regulatory authorities. These reserves are a component of monetary policy and reflect a bank's liquidity position beyond its minimum obligations. When commercial banks hold Ueberschussreserven, it indicates that they have more funds deposited with the central bank than are necessary to meet their reserve requirements or clear transactions.
History and Origin
Historically, banks held a minimal amount of Ueberschussreserven because reserves did not earn interest, creating an opportunity cost. This incentive structure changed significantly in the aftermath of the 2008 financial crisis. The Emergency Economic Stabilization Act of 2008 advanced the effective date for the Federal Reserve to pay interest on reserves to October 1, 200827. This policy change fundamentally altered the economics of holding reserves, providing banks with a reason to hold higher balances.
Following the 2008 crisis, the Federal Reserve undertook large-scale asset purchases, such as quantitative easing, which injected substantial amounts of reserves into the banking system26. As a result, Ueberschussreserven in the U.S. banking system surged from tens of billions of dollars to trillions25. This marked a dramatic shift from previous periods when total reserves fluctuated between $38 billion and $56 billion in the five years prior to September 200824. The Federal Reserve stated that this increase in excess reserves was a byproduct of its policy actions to address the severe financial crisis23.
Key Takeaways
- Ueberschussreserven are funds held by banks at the central bank that exceed mandated requirements.
- Central banks can influence the amount of Ueberschussreserven through monetary policy tools.
- The payment of interest on reserves, introduced by the Federal Reserve in 2008, significantly changed banks' incentives to hold Ueberschussreserven.
- High levels of Ueberschussreserven can indicate ample liquidity within the banking system.
- As of March 26, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent, effectively eliminating mandatory reserve requirements for all depository institutions21, 22.
Formula and Calculation
Prior to March 26, 2020, when reserve requirements were active, Ueberschussreserven could be calculated as:
Where:
- (\text{Gesamtreserven}) represents the total amount of reserves a financial institution holds at the central bank.
- (\text{Erforderliche Reserven}) (Required Reserves) represents the minimum amount of reserves a bank is legally obligated to hold, often a percentage of its eligible deposits, as determined by the central bank's reserve requirements.
Since March 26, 2020, with the elimination of reserve requirements, all reserves held by depository institutions at the Federal Reserve are effectively Ueberschussreserven, as there is no longer a mandatory minimum.19, 20
Interpreting Ueberschussreserven
High levels of Ueberschussreserven can be interpreted in several ways within the context of economic growth and monetary policy. Historically, large Ueberschussreserven might suggest that banks were hesitant to lend, indicating weak loan demand or increased risk aversion. However, in modern central banking frameworks, particularly since central banks began paying interest on reserves, a significant volume of Ueberschussreserven is often a direct consequence of central bank actions, such as large-scale asset purchases designed to inject liquidity and stimulate the economy18.
When a central bank pays interest rates on Ueberschussreserven, it sets a floor for short-term market interest rates, as banks would not lend funds in the market at a rate lower than what they can earn risk-free at the central bank16, 17. Thus, the level of Ueberschussreserven helps the central bank manage the money supply and implement its policy targets.
Hypothetical Example
Consider a scenario before March 2020 where a commercial bank held $100 million in deposits subject to a 10% reserve requirement. This would mean the bank was required to hold $10 million in reserves. If the bank, however, maintained $15 million in its account at the central bank, its Ueberschussreserven would be $5 million ($15 million - $10 million).
In the post-March 2020 environment, if that same bank now holds $15 million in its central bank account, with reserve requirements set at zero, the entire $15 million would be considered Ueberschussreserven. This illustrates how policy changes can redefine what constitutes excess.
Practical Applications
Ueberschussreserven play a role in the implementation of monetary policy by central banks. Before 2008, central banks primarily managed the level of reserves through open market operations to influence the Federal Funds Rate. With the advent of interest on reserves, central banks gained a more direct tool to influence short-term interest rates even when the banking system has ample reserves15.
For instance, if the Federal Reserve wants to raise the federal funds rate, it can increase the interest rate it pays on Ueberschussreserven. This encourages banks to hold onto their reserves rather than lending them out, thereby reducing the supply of funds in the interbank market and pushing up the federal funds rate13, 14. Conversely, lowering the interest rate on Ueberschussreserven might encourage banks to lend more, potentially stimulating lending and economic activity. The Federal Reserve, as announced on March 15, 2020, reduced reserve requirement ratios to zero percent to eliminate the need for thousands of depository institutions to maintain balances at Reserve Banks for reserve requirements, thus "freeing up liquidity in the banking system to support lending to households and businesses."12
Limitations and Criticisms
While Ueberschussreserven offer flexibility in monetary policy, their presence, especially in large quantities, has led to discussions about potential drawbacks. Some economists have raised concerns that high levels of Ueberschussreserven could pose a risk of future inflation if banks suddenly decide to significantly increase lending, though central banks have tools, such as the interest rate on reserves, to manage this risk11.
Another criticism relates to the effectiveness of monetary transmission when Ueberschussreserven are abundant. In an environment with ample reserves, the traditional link between reserve levels and bank lending might weaken, making it more challenging for central banks to stimulate economic growth purely by increasing reserves. The International Monetary Fund (IMF) has discussed the implications of unconventional monetary policies and excess reserves, noting the challenges and the need for new frameworks to manage liquidity effectively7, 8, 9, 10.
Ueberschussreserven vs. Required Reserves
Ueberschussreserven and required reserves are both categories of funds that commercial banks hold at the central bank. The primary distinction lies in their purpose and legal status. Required reserves were the minimum amount of funds a bank was legally mandated to hold against its deposits, serving as a prudential measure and a tool for monetary policy control. Ueberschussreserven, conversely, are any funds held by the bank that surpass this mandatory requirement. Before March 2020, banks maintained required reserves to meet regulatory obligations, while Ueberschussreserven were typically held for short-term liquidity needs or when interest was paid on them. With the Federal Reserve setting reserve requirements to zero percent, the distinction from a regulatory compliance standpoint has largely diminished for U.S. banks; all balances held above zero are now, by definition, excess6.
FAQs
Why do banks hold Ueberschussreserven?
Banks may hold Ueberschussreserven for several reasons. Primarily, they do so to maintain adequate liquidity to meet unexpected withdrawals or payment obligations. Since 2008, a major incentive has been the interest paid on these reserves by central banks, which provides a risk-free return5.
How do Ueberschussreserven impact the economy?
Large amounts of Ueberschussreserven can indicate that banks have ample funds but might not be lending them out. While this doesn't automatically lead to inflation, it allows the central bank to influence the broader economy by adjusting the interest rates paid on these reserves, affecting interbank lending and the cost of credit.
What is the Federal Reserve's current stance on reserve requirements?
As of March 26, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent for all depository institutions. This means that banks are no longer legally required to hold a specific percentage of their deposits as reserves2, 3, 4.
Are Ueberschussreserven inflationary?
Not inherently. While a large quantity of Ueberschussreserven means banks have the capacity to expand lending and increase the money supply, central banks can manage this potential inflationary pressure by adjusting the interest rate they pay on these reserves, influencing banks' incentive to lend1.