Bank Reserves: Required, Excess, Borrowed
Reserves are the funds a bank holds at the central bank plus its vault cash. Required reserves are held against deposits, excess reserves are anything above that, and borrowed reserves come from the central bank’s discount window. Reserves are the lever monetary policy pulls.
Why it matters
Reserves are a bank’s ready cash for settling withdrawals and payments. Holding more than required is safe but costly, which is why the interest the central bank pays on reserves now shapes how many banks choose to hold.
Worked examples
A bank has $100 million in checkable deposits and a 10% reserve requirement, and it holds $13 million in reserves. Split that into required and excess.
Required reserves are 10% of $100 million, so $10 million. The remaining $3 million is excess reserves, a voluntary buffer.
Common mistakes
- ✗Banks lend out their reserves to customers. Reserves stay within the banking system. Lending creates new deposits, and the reserves move between banks at settlement.
- ✗Excess reserves are useless idle cash. They are a liquidity buffer, and central banks now pay interest on reserves, which makes holding them a real choice.
Revision bullets
- •Reserves are deposits at the central bank plus vault cash
- •Required, excess, and borrowed reserves
- •Interest on reserves shapes how much banks hold
Quick check
A bank holds reserves above what its deposits require. The surplus is called
Connected topics
Sources
- Mishkin (2018), Ch. 15Mishkin, F. S. The Economics of Money, Banking, and Financial Markets. 12th ed. Pearson, 2018. ISBN 978-1-292-26885-9.Bank reserves, the T-account view of deposit creation, and required vs excess reserves.