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Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late '90s

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  • Kazuo Ogawa

Abstract

We investigated, empirically, why Japanese banks held excess reserves in the late 1990s. Specifically, we pin down two factors explaining the demand for excess reserves: a low short-term interest rate, or call rate, and the fragile financial health of banks. The virtually zero call rate increased the demand for excess reserves substantially, and a high bad loans ratio largely contributed to the increase in excess reserve holdings. We found that the holdings of excess reserves would fall by half if the call rate were to be raised to its level prior to the adoption of the zero-interest-rate policy, and the bad loans ratio were to fall by 50%.

Suggested Citation

  • Kazuo Ogawa, 2004. "Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late '90s," ISER Discussion Paper 0625, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:0625
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    File URL: https://www.iser.osaka-u.ac.jp/library/dp/2004/DP0625.pdf
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    1. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
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    1. Green, Christopher & Bai, Ye & Murinde, Victor & Ngoka, Kethi & Maana, Isaya & Tiriongo, Samuel, 2016. "Overnight interbank markets and the determination of the interbank rate: A selective survey," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 149-161.
    2. Ryu‐ichiro Murota & Yoshiyasu Ono, 2012. "Zero Nominal Interest Rates, Unemployment, Excess Reserves And Deflation In A Liquidity Trap," Metroeconomica, Wiley Blackwell, vol. 63(2), pages 335-357, May.

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