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

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

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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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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