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. Capital Adequacy Ratio - CAR

    A measure of a bank's capital. It is expressed as a percentage ...
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 >>
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. Entrepreneurship

    JPMorgan vs. Goldman Sachs: A Tale of Two Stocks

    The performance of JPMorgan and Goldman has been impressive, but one has a slight edge.
  6. Entrepreneurship

    Which is The Best Bank for Your Buck, BAC or MS?

    One things stands out between these financial services giants when it comes to investing in them.
  7. Investing Basics

    An Investor's Guide To Bank Stress-Testing

    Just how are bank stress tests performed and what is the logic behind them? And is a stress test useful for evaluating a bank's stock?
  8. Stock Analysis

    How Bank of America Holds 1/8 of All U.S. Deposits

    Bank of America isn't America's central bank, but given its size and spread, you could be forgiven this misapprehension.
  9. Stock Analysis

    JPMorgan Chase: Too Big (And Profitable) To Fail

    If there's any bank that's too big to fail, JPMorgan Chase & Co. may very well be the best example. Just look at its return on equity.
  10. Stock Analysis

    How Wells Fargo Became The Biggest Bank In America

    How does WFC make money? They lend it out at a higher rate than they borrow it at. Simple, right? But the real story is how proficient they are at it.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center