DEFINITION of 'Non-Borrowed Reserves'

Non-borrowed reserves are bank reserves that are not borrowed from the central bank.

BREAKING DOWN 'Non-Borrowed Reserves'

Under the fractional reserve banking system, depository institutions lend out most of the deposits they receive from customers. In order to increase financial stability – discouraging bank runs, for example – central banks impose reserve requirements, forcing these institutions to keep a certain portion of their funds either as vault cash or in accounts at the central bank.

To satisfy these reserve requirements, banks can borrow from the central bank. The Federal Reserve offers overnight loans to commercial banks at the discount rate. Reserves that are not borrowed in this way are non-borrowed reserves.

In practice the vast majority of reserves in the U.S. are non-borrowed, since discount window borrowing is relatively expensive and carries a stigma. Since the financial crisis, the Fed has paid interest on excess reserves – reserves that exceed the requirement. Combined with a near-zero federal funds rate, that policy drove the level of excess reserves to unprecedented levels, meaning that few institutions had a need to borrow to make up a shortfall.

 

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