Excess Reserves

Banks keep reserves, mainly as deposits at the central bank, to settle payments with other banks and meet any reserve requirements. Any reserves above the required level are excess reserves.

Before 2008, banks in the United States typically held very few excess reserves, because they earned no interest. After the financial crisis, the Federal Reserve began paying interest on reserves, and quantitative easing created very large amounts of new reserves. Excess reserves grew enormously.

Since the Federal Reserve cut reserve requirements to zero in March 2020, the distinction between required and excess reserves has lost much of its meaning in the United States, and the focus is now on total reserves.

For example, if a bank holds 10,000,000,000 at the central bank and its required reserves are 2,000,000,000, it has excess reserves of 8,000,000,000. The interest rate paid on reserves has become an important tool for central banks to keep market interest rates within their target ranges.