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Can depository institutions create money using their excess reserves to loan money?
Yes. They can sell their reserves, which are really just deposits by banks at the Federal Reserve, to other banks or simply withdraw them from the Fed, replacing them with cash, and make loans with that cash or buy lending assets such as bonds. See "fractional reserve lending".
Considering the record rise in reserves, we should expect a veritable tsunami of lending any minute. Commercial banks are holding a record proportion of cash predominantly in the form of those reserve deposits at the Fed. They're holding so much that they actually stand to lose money if they don't lend because of the cost of their liabilities versus the next to 0% rates of revenue from those excess reserves. See "borrow short, lend long" and "net interest margin".
Another view holds that the currently high level of reserves on deposit with the Fed ($1.08T as of 10/28/09) will not be reduced without an explicit change in Fed or Treasury policy. The Fed only has a capital level of $52.5B as of 10/28/09. Therefore a material reduction in the amount of reserves would require a concurrent reduction in assets or an offsetting increase in liabilities to maintain the solvency of the Fed's balance sheet. A significant reduction in assets would require the sale of Treasuries and Agency securities held by the Fed and therefore a reversal of current Fed policy to purchase such securities to lower interest rates for mortgages. Prior examples of increased liabilities include the Treasury's Supplemental Financing Program(SPF) begun in September 2008 where Treasuries were sold and the proceeds deposited with the Fed in a special account. Recent constraints imposed by the current debt ceiling of $12.1T have led to reductions in the SPF account and offsetting increases in the level of reserves on deposit. From this point of view, the arrival of any tsunami of new lending will necessarily be preceded by explicit policy changes that should not be expected before an increase in the debt ceiling at least $500B over annual deficit requirements of about $1.4T or a Fed announcement that Treasury and Agency sales are to begin.
High-powered money has doubled in the US in a 3 month period or so. All of that new cash is powerful enough to double the amount of credit in the US, currently $55t.
This is all safe, for the moment, because we are rapidly deflating. Once we start inflating again, Mr. Bernanke will sell the assets on the Fed's balance sheet, and things will return to normal, removing the record amount of cash in the US.
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What are excess reserves?
They are reserves of cash more than the required amounts.
What do banks do with their excess reserves?
Banks use excess reserves to make loans to customers so that they can make profits on the interest Commercial banks cannot use excess reserves to make common loans. They can only use them to make loans to other banks who may need more required reserves. Excess reserves increase the monetary base but do not enter the M1 or M2 money supply. The only entity that can effect the total excess reserves is the Federal Reserve. When the fed decides to reduce its balance sheet, it will sell assets in the market and reduce an equal amount of excess reserves.
List and define two types of bank reserves?
Secondary Reserves- Assets that are invested in safe, marketable, short-term securities.Primary Reserves- Cash required to operate a bank.here is a third one...Excess Reserves- Capital reserves held by a bank in excess of what is required.
What banks do when they do not have excess reserves?
reserving bank
What is cash and currency not needed?
Excess Reserves
What are excess reserves?
They are reserves of cash more than the required amounts.
What do banks do with their excess reserves?
Banks use excess reserves to make loans to customers so that they can make profits on the interest Commercial banks cannot use excess reserves to make common loans. They can only use them to make loans to other banks who may need more required reserves. Excess reserves increase the monetary base but do not enter the M1 or M2 money supply. The only entity that can effect the total excess reserves is the Federal Reserve. When the fed decides to reduce its balance sheet, it will sell assets in the market and reduce an equal amount of excess reserves.
Why do commercial bank lend out the excess reserves?
They dont loan out their excess reserves. They only have excess reserves because they dont have loan demand from qualified borrowers and the marginal return from an average loan is greater than the interest paid on the excess reserves. IE they have to receive a marginal return of X amount above .25% they now receive on their excess reserves from a borrower SO 1. They have to loan demand 2. Qualified borrower 3. Net marginal return of higher than the amount of interest they receive on their reserves.
List and define two types of bank reserves?
Secondary Reserves- Assets that are invested in safe, marketable, short-term securities.Primary Reserves- Cash required to operate a bank.here is a third one...Excess Reserves- Capital reserves held by a bank in excess of what is required.
What banks do when they do not have excess reserves?
reserving bank
What is cash and currency not needed?
Excess Reserves
Which of the following most accurately describes what banks do with their excess reserves?
Banks use excess reserves to make loans to customers so that they can make profits on the interest.
When To Release The Reserves Withholdings?
Excess reserves will be released two times a year after initial hold.
Why do banks try to keep excess reserves as low as possible?
Because, the excess reserves they hold are going to stay idle in their vaults (safe deposit boxes) and are not going to earn any money for them. Instead if they loan it out to customers, they can earn an interest on the same. So banks try to keep their excess reserves as low as possible.
Are funds that the bank uses to satisfy the reserve requirement?
excess reserves
What are the funds that banks use to satisfy the reserve requirement?
excess reserves
A commercial bank cannot lend out more than?
excess reserves
