A note on bank lending in times of large bank reserves
AbstractThe amount of reserves held by the U.S. banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve’s interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks’ lending decisions. We find that large reserve balances do not lead to excessive bank credit and may instead be contractionary.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 497.
Date of creation: 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-18 (All new papers)
- NEP-BAN-2011-06-18 (Banking)
- NEP-CBA-2011-06-18 (Central Banking)
- NEP-MON-2011-06-18 (Monetary Economics)
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