Excess Reserves

In banking, excess reserves are bank reserves in excess of the reserve requirement set by a central bank. They are reserves of cash more than the required amounts. Holding excess reserves has an opportunity cost if higher risk-adjusted interest can be earned by putting the funds elsewhere; the advantage of holding some funds in excess reserves is that doing so may provide enhanced liquidity and therefore more smooth operation of payment system.

For banks in the U.S. Federal Reserve System, this is accomplished by making short-term (usually overnight) loans on the federal funds market to banks who may be short of their reserve requirements. However, some banks may choose to hold their excess reserves in order to facilitate upcoming transactions or meet contractual clearing balance requirements.

The minimum reserves and the excess reserves of private (commercial) banks are held as FRB (Federal Reserve Bank) credit in FRB accounts. The total amount of FRB credit held by private banks and the amount of FRB credit that the US government holds in its FRB account, together with all currency and vault cash form the monetary base.