Skip to main content

The impact of banks’ liquidity reserves on lending

Journal of Banking Regulation volume 19, pages 337–345 (2018)Cite this article

Abstract

The paper examines the impact from liquidity reserves on banks’ lending. Analysing a large sample of US banks, we discover that the lending of our firms is lower when they hoard liquidity in the form of cash, inter-bank deposits, or through transactions on federal funds. Further results reveal that the effect is stronger after the last quarter of 2008, namely after that the Federal Reserve started to pay interests on banks’ reserves. The paper contributes to the discussion around the implications on the credit to the real economy from central banks’ interventions of monetary policy and in particular from the discipline of reserves.

This is a preview of subscription content, access via your institution.

Access options

Buy single article

Instant access to the full article PDF.

USD 39.95

Price includes VAT (USA)
Tax calculation will be finalised during checkout.

Fig. 1
Fig. 2
Fig. 3

Notes

  1. Board of Governors of the Federal Reserve System, 2016, Reserve Requirements, Available at https://www.federalreserve.gov/monetarypolicy/reservereq.htm.

  2. Board of Governors of the Federal Reserve System, 2008, “Board announces that it will begin to pay interest on depository institutions’ required and excess reserve balances,” Press release, October 6. Available at www.federalreserve.gov/newsevents/press/other/20081008a.htm.

  3. According to the Financial Services Regulatory Relief Act of 2006, Congress authorized the Fed to pay interest on reserves effective 1 October 2011, but its implementation moved up to 1 October 2008, as part of the Fed’s response to the financial crisis.

  4. See www.snl.com.

  5. See the “Instructions for Preparation of Consolidated Reports of Condition and Income” from the Federal Financial Institutions Examination Council's (FFIEC) at www.ffiec.gov.

  6. See the definition in the forms 10-K and 10-Q filled to the United States Securities and Exchange Commission—SEC (www.sec.gov).

  7. In Eq. (1), we use the figure for gross loans, which includes loan-loss reserves. We checked that the quality of the empirical results does not change when we employ the item for net loans, where loans are net of loan-loss reserves.

  8. Mankiw [5] mentions the proposal made by the German economist Silvio Gesell in the late nineteenth century, to tax the holding money in order to encourage lending.

References

  1. Williamson, S.D. 2015. Monetary Policy Normalization in the United States. Federal Reserve Bank of St. Louis Review 97(2): 87–108.

    Google Scholar 

  2. Williamson, S.D. 2016. Interest Rate Control is More Complicated Than You Thought. Federal Reserve Bank of St. Louis. The Regional Economist. Available at https://www.stlouisfed.org/publications/regional-economist/april-2016/interest-rate-control-is-more-complicated-than-you-thought.

  3. Keister, T., and J.J. McAndrews. 2009. Why are Banks Holding So Many Excess Reserves? Federal Reserve Bank of New York Current Issues in Economics and Finance 15(8): 1–10.

    Google Scholar 

  4. Stiglitz, J.E., and H. Rashid. 2012. What’s Holding Back the World Economy?. Available at https://www.project-syndicate.org/commentary/whats-holding-back-the-global-economy-by-joseph-e–stiglitz-and-hamid-rashid-2016-02.

  5. Mankiw, N.G. 2009. It May Be Time for the Fed to Go Negative. New York Times, April 19.

  6. Edlin, A.S., and D.M. Jaffee. 2009. Show Me the Money. The Economists’ Voice 6(4): 8.

    Google Scholar 

  7. Selgin, G. 2016. Interest on Reserves and the Fed’s Balance Sheet. Available at http://www.cato.org/publications/testimony/interest-reserves-feds-balance-sheet.

  8. Keen, S. 2016. Hey Joe Banks Can’t Lend Out Reserves. Available at http://www.forbes.com/sites/stevekeen/2016/02/12/hey-joe-banks-cant-lend-out-reserves/6/#7e8237612465.

  9. Coppola, F. 2016. It was the Financial Crisis that Stopped Banks Lending not Interest on Excess Reserves. Available at http://www.forbes.com/sites/francescoppola/2016/01/12/it-was-the-financial-crisis-that-stopped-banks-lending-not-interest-on-excess-reserves/2/#4b9ecedb7cf4.

  10. Sumner, S. 2009. Comment on Brad Delong: Can We Generate Controlled Reflation in a Liquidity Trap? The Economists’ Voice 6(4): 7.

    Google Scholar 

  11. Dasgupta, S. 2009. Comment on Luigi Zingales: Why Not Consider Maximum Reserve Ratios? The Economists’ Voice 6(4): 6.

    Google Scholar 

  12. Goodfriend, M. 2002. Interest on Reserves and Monetary Policy. Federal Reserve Bank of New York Economic Policy Review 8(1): 13–29.

    Google Scholar 

  13. Woodford, M. 2000. Monetary Policy in a World Without Money. International Finance 3(2): 229–260.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Economics and Management, Free University of Bozen, Universitaetsplatz 1, Bozen-Bolzano, Italy

    Silvia Bressan

Authors
  1. Silvia Bressan
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Silvia Bressan.

Appendix

Appendix

Variable name Description
Cash (000$) Cash and cash equivalents
Deposits at banks (000$) Interest-bearing deposits at other financial institutions
Fed funds (000$) Overnight deposits at a Federal Reserve bank and securities purchased under agreements to resell
Loans (000$) Loans and finance leases held for investment or held for sale, net of unearned discount, and gross of loss reserves. Does not include accrued interest on loans
Assets (000$) Total assets
Size Natural logarithm of total assets
ROA (%) Return on average assets; net income as a percentage of average assets
Equity (000$) Total equity
Risk-weighted capital ratio (%) Sum of Tier 1 and Tier 2 capital over risk-weighted assets
Fed funds rate Fed funds rate at the end of the specified period
Low capital Dummy variable taking value one if the company’s equity/assets is less than the median equity/assets (equal to 10.02%)
Low reg capital Dummy variable taking value one if the company’s risk-weighted capital ratio is less than the median risk-weighted capital ratio (equal to 14.93%)
2008q4 Dummy variable taking value one if the data is observed during 2008q4
Post2008q4 Dummy variable taking value one if the data is observed during 2008q4–2016q2

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Bressan, S. The impact of banks’ liquidity reserves on lending. J Bank Regul 19, 337–345 (2018). https://doi.org/10.1057/s41261-018-0079-y

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/s41261-018-0079-y

Keywords

  • Banks
  • Reserves
  • Lending

JEL Classification

  • G21
  • G28