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Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late 1990s

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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 two-thirds 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%. Copyright 2007 The Ohio State University.

Suggested Citation

  • Kazuo Ogawa, 2007. "Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late 1990s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 241-257, February.
    • Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:1:p:241-257
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    Cited by:

    1. Chang, Su-Hsin & Contessi, Silvio & Francis, Johanna L., 2014. "Understanding the accumulation of bank and thrift reserves during the U.S. financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 78-106.
    2. Festic, Mejra & Kavkler, Alenka, 2012. "The Roots of the Banking Crisis in the New EU Member States: A Panel Regression Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 20-40, March.
    3. Lagoarde-Segot, Thomas & Leoni, Patrick L., 2013. "Pandemics of the poor and banking stability," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4574-4583.
    4. Masami Imai, 2008. "Crowding-Out Effects of a Government-Owned Depository Institution: Evidence from a Natural Experiment in Japan," Wesleyan Economics Working Papers 2008-003, Wesleyan University, Department of Economics.
    5. Bowman, David & Cai, Fang & Davies, Sally & Kamin, Steven, 2015. "Quantitative easing and bank lending: Evidence from Japan," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 15-30.
    6. Khemraj, Tarron, 2011. "The Non-Zero Lower Bound Lending Rate and the Liquidity Trap," MPRA Paper 42030, University Library of Munich, Germany, revised 01 May 2012.
    7. NAKABAYASHI, Masaki, 2013. "Contained Crisis and Socialized Risk: Unconventional Monetary Policy by the Bank of Japan in the 1890s," ISS Discussion Paper Series (series F) f165, Institute of Social Science, The University of Tokyo, revised 02 Aug 2016.
    8. Matthew Schaffer & Nimrod Segev, 2023. "Quantitative Easing, Bank Lending, and Aggregate Fluctuations," Bank of Israel Working Papers 2023.01, Bank of Israel.
    9. Khemraj, Tarron, 2013. "Bank liquidity preference and the investment demand constraint," Economic Modelling, Elsevier, vol. 33(C), pages 977-990.

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