Commercial banks are concerned with taking hold of customers’ deposits and taking care of them till the time people need them. their deposits not just merely comprises of the people’s money but also they have a certain amount of extra money with them which is called vas excess reserves which they use in time of crisis or as the situation prevails.
The greateramount of reserves with the banks leads to more amount of loans granted by the Commercial banks. Also, greater reserves mean that the bank is protected from future liabilities and can withstand their customer’s unexpected withdrawals.
What decides the number of the bank’s reserves?
To know what amount of reserves a bank should keep, one must first know what reserves exactly mean. Reserve means cash reserve ratio. It refers to the necessary amount of money that a bank must keep with itself to meet any unexpected rise resulting from customers’ unexpected withdrawals.
What are excess reserves?
Excess reserves are capital reserves that a bank keeps in addition to the requirements of creditors,regulators.we can simply classify excess reserves as secondary reserves. They mark the amount of the least liquid deposit of a Commercial banks.
What do banks do with extra reserves?
not every penny of the extra reserve is meant for a loan. The corresponding checking account deposits are not created.
Reasons for the increase in reserves of the Commercial banks:
When the central Commercial banks buys assets or certain banks and firms take loans, the reserves of the bank increase in correspondence to the exact money lent out.
Difference between reserves and excess reserves
When the bank has reserves beyond the legally fixed amount it is known as excess reserves.
And when the bank has just a sufficient amount of reserves that are legally declared, it is known as reserves.
Sometimes banks intentionally hold excess reserves to meet their customer’s needs. the bank also keeps hold of them to meet federal reserve requirements.
Meaning of excess reserve interest-
Another aspect of IOR is IORT which means the interest paid on the balances that are in addition to the reserves set by the DI.
Excess reserves=assets or liabilities?
This is often sometimes confusing for people whether the extra reserves of the banks are their assets or liabilities.
Excess reserves form the Commercial banks assets and the central bank’s monetarily liabilities. Risk-adjusted returns are always very negligible, therefore, banks hold these assets in terms of cash instead of cycling liquidity through the system in the form of loans.
The excess reserves also impact the money supply in a great manner as the banks loan out the extra reserves to the general public.this leads to an increment in the money supply.
So the excess reserves directly influence the money supply.Money is created when banks loan out their reserves.
Also,it is true to say that there are a lot of benefits of the banks holding the money with them.