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

  • Kazuo Ogawa

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%.

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File URL: http://www.iser.osaka-u.ac.jp/library/dp/2004/DP0625.pdf
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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0625.

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Date of creation: Dec 2004
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Handle: RePEc:dpr:wpaper:0625
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