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Understanding the accumulation of bank and thrift reserves during the U.S. financial crisis

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  • Su-Hsin Chang
  • Silvio Contessi
  • Johanna L. Francis

Abstract

The level of aggregate excess reserves held by U.S. depository institutions increased significantly at the peak of the financial crisis of 2007-09. Although the amount of aggregate reserves is almost entirely determined by the policy initiatives of the central bank that act on the asset side of its balance sheet, the motivations of individual banks in accumulating reserves differ and respond to the impact of changes in the economic environment on individual institutions. We undertake a systematic analysis of this massive accumulation of excess reserves using bank-level data for more than 7,000 commercial banks and almost 1,000 savings institutions during the U.S. financial crisis. We propose a testable stochastic model of reserves determination when interest is paid on reserves, which we estimate using bank-level data and censored regression methods. We find evidence primarily of a precautionary motive for reserves accumulation with some notable het- erogeneity in the response of reserves accumulation to external and internal factors of the largest banks compared with smaller banks. We combine propensity score matching and a difference-in- difference approach to determine whether the beneficiaries of the Capital Purchase Program of the Troubled Assets Relief Program accumulated lower reserves than non-beneficiaries. Contrary to anecdotal evidence, we find that banks that participated in the program accumulated fewer reserves than non-participants in the initial quarters after the capital injection.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-029.

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Date of creation: 2013
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Handle: RePEc:fip:fedlwp:2013-029

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Keywords: Financial crises ; Bank reserves;

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  1. Olivier Armantier & Eric Ghysels & Asani Sarkar & Jeffrey Shrader, 2011. "Stigma in financial markets: evidence from liquidity auctions and discount window borrowing during the crisis," Staff Reports 483, Federal Reserve Bank of New York.
  2. Morten L. Bech & Elizabeth Klee, 2010. "The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market," Finance and Economics Discussion Series 2010-07, Board of Governors of the Federal Reserve System (U.S.).
  3. Christopher F. Baum & Mustafa Caglayan & Neslihan Ozkan, 2002. "The second moments matter: The impact of macroeconomic uncertainty on the allocation of loanable funds," Boston College Working Papers in Economics 521, Boston College Department of Economics, revised 31 Aug 2008.
  4. Charles W. Calomiris & Berry Wilson, 2004. "Bank Capital and Portfolio Management: The 1930s "Capital Crunch" and the Scramble to Shed Risk," The Journal of Business, University of Chicago Press, vol. 77(3), pages 421-456, July.
  5. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  6. Cooper, J Phillip, 1971. "Stochastic Reserve Losses and Expansion of Bank Credit: Note," American Economic Review, American Economic Association, vol. 61(4), pages 741-45, September.
  7. Silvio Contessi & Johanna L. Francis, 2011. "TARP beneficiaries and their lending patterns during the financial crisis," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 105-126.
  8. David Bowman & Etienne Gagnon & Mike Leahy, 2010. "Interest on excess reserves as a monetary policy instrument: the experience of foreign central banks," International Finance Discussion Papers 996, Board of Governors of the Federal Reserve System (U.S.).
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