Excess Reserves

AAA

DEFINITION of 'Excess Reserves'

Capital reserves held by a bank or financial institution in excess of what is required by regulators, creditors or internal controls. For commercial banks, excess reserves are measured against standard reserve requirement amounts set by central banking authorities. These required reserve ratios set the minimum liquid deposits (such as cash) that must be in reserve at a bank; more is considered excess.

INVESTOPEDIA EXPLAINS 'Excess Reserves'

Financial firms that carry excess reserves have an extra measure of safety in the event of sudden loan losses or cash withdrawals by customers. This may increase the attractiveness of the company that holds excess reserves to investors, especially in times of economic uncertainty. Boosting the level of excess reserves can also improve an entity's credit rating, as measured by ratings agencies like Standard & Poor's.

Reserves need to be in liquid forms of capital such as cash in a vault, which does not create income. Banks will therefore try to minimize their excess reserves by lending the maximun allowable amount to borrowers.

RELATED TERMS
  1. Working Reserves

    Reserves held by banks above the required minimum level - or ...
  2. Non-Borrowed Reserves

    A measure of the reserves in the banking system. Non-borrowed ...
  3. Risk-Adjusted Capital Ratio

    A measure of a financial institutions that compares total adjusted ...
  4. Lagged Reserves

    A method of bank reserve calculation whereby the financial institution ...
  5. Free Reserves

    A measurement of a bank's reserves that is equal to the difference ...
  6. Tier 1 Capital

    A term used to describe the capital adequacy of a bank. Tier ...
RELATED FAQS
  1. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Full Answer >>
  2. What are some of the well-known no-load funds?

    The capital adequacy ratio promotes stability and efficiency of worldwide financial systems and banks. The capital to risk-weighted ... Read Full Answer >>
  3. Why do long-term care insurers require the loss of two Activities of Daily Living ...

    A merchant would use a banker's acceptance for several reasons, particularly when engaged in international trade. One of ... Read Full Answer >>
  4. Are money market accounts for short-term investments a good idea?

    Money market accounts are a good idea for short-term investments. Some of the desired traits in short-term investments are ... Read Full Answer >>
  5. Did the repeal of the Glass-Steagall Act contribute to the 2008 financial crisis?

    The repeal of the Glass-Steagall Act was a minor contributor to the financial crisis, if it contributed to the crisis at ... Read Full Answer >>
  6. What is the relationship between national interest rates and the amount of revolving ...

    National interest rates and the amount of revolving credit issued have a negative relationship. Interest rates rise due to ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    An Introduction To Sovereign Wealth Funds

    Countries use sovereign wealth funds to stabilize their economies, but these investments can lack transparency.
  2. Forex Education

    How To Profit From Interventions In The Forex Market

    The forex market can be extremely profitable. Learn how to spot an intervention and trade when it's occurring.
  3. Personal Finance

    How The Federal Reserve Manages Money Supply

    Find out how the Fed manages bank reserves and this contributes to a stable economy.
  4. Personal Finance

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  5. Economics

    Explaining Risk-Weighted Assets

    Risk-weighted assets is a banking term that refers to a method of measuring the risk inherent in a bank’s assets, which is typically its loan portfolio.
  6. Economics

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  7. Economics

    Explaining the Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment banking business.
  8. Credit & Loans

    How To Increase Your Appeal To Prospective Lenders

    Making a business eligible for loans/credit cards at the best possible rates requires crafting an excellent credit profile through the smart use of credit.
  9. Investing News

    Investing Early In The Future of Data Security

    Data breaches are becoming increasingly common. Among the foremost technologies paving the path for the future of data security is biometrics.
  10. Economics

    Will “Internet-Only” Banks Change Chinese Banking?

    Private players offering internet-only banking services to a large section of China's population must overcome some challenges to gain market momentum.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center