What is excess and short reserves?
Understand the Problem
The question is asking for an explanation of the terms 'Excess reserves' and 'short reserves', which are concepts related to banking and finance that involve the amount of funds a bank holds in reserve compared to what is required by regulatory authorities.
Answer
Excess reserves are funds above required reserves; short reserves are funds below required reserves.
Excess reserves are the funds that banks hold over the required reserve minimum. These funds are cash reserves held by banks above what is required by regulators and are not loaned out. Short reserves refer to a situation where banks hold fewer reserves than required.
Answer for screen readers
Excess reserves are the funds that banks hold over the required reserve minimum. These funds are cash reserves held by banks above what is required by regulators and are not loaned out. Short reserves refer to a situation where banks hold fewer reserves than required.
More Information
Excess reserves are particularly emphasized in monetary policy discussions, as they can influence a bank's ability to lend and indirectly affect interest rates. They became especially important post-financial crisis when banks held large volumes of excess reserves.
Tips
A common mistake is confusing excess reserves with liquidity problems; excess reserves mean there's ample liquidity beyond what is required.
Sources
- Excess Reserves - Overview, How It Works, interbank Rate - corporatefinanceinstitute.com
- Definition of Excess Reserves | Higher Rock Education - higherrockeducation.org
- Excess reserves - Wikipedia - en.wikipedia.org
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