Excess Reserves
Definition
Excess reserves are funds held by banks that exceed their required reserve ratio, which is the minimum amount they must keep on hand based on customer deposits.
Analogy
Imagine you have $100 in your piggy bank, but you only need $20 for immediate use. The remaining $80 would be considered your excess reserves - money that you could potentially lend to others or invest.
Related terms
Cash Reserves: Cash reserves are part of excess reserves and represent physical currency or deposits with the central bank that banks hold rather than lending out.
Loanable Funds Market: The loanable funds market refers to the interaction between borrowers (those seeking loans) and lenders (those providing loans), where excess reserves play a role in determining interest rates.
Monetary Policy: Monetary policy refers to actions taken by central banks, such as adjusting interest rates or reserve requirements, which can impact excess reserves and overall economic conditions.
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