Excess reserves

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Excess reserves are bank reserves held by a bank in excess of a reserve requirement for it set by a central bank.^[1]

In the United States, bank reserves for a commercial bank are represented by its cash holdings and any credit balance in an account at its Federal Reserve Bank (FRB). Holding excess reserves long term may have an opportunity cost if higher risk-adjusted interest can be earned by putting the funds elsewhere.

For banks in the U.S. Federal Reserve System, excess reserves may be created by a given bank in the very short term by making short-term (usually overnight) loans on the federal funds market to another bank that may be short of its reserve requirements. Banks may also choose to hold some excess reserves to facilitate upcoming transactions or to meet contractual clearing balance requirements.^[2]

The total amount of FRB credits held in all FRB accounts for all commercial banks, together with all currency and vault cash, forms the M0 monetary base.