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A note on bank lending in times of large bank reserves

Author

Listed:
  • Antoine Martin
  • James J. McAndrews
  • David R. Skeie

Abstract

The 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.

Suggested Citation

  • Antoine Martin & James J. McAndrews & David R. Skeie, 2011. "A note on bank lending in times of large bank reserves," Staff Reports 497, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:497
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    References listed on IDEAS

    as
    1. Xavier Freixas & Antoine Martin & David Skeie, 2011. "Bank Liquidity, Interbank Markets, and Monetary Policy," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2656-2692.
    2. Adam Ashcraft & James Mcandrews & David Skeie, 2011. "Precautionary Reserves and the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 311-348, October.
    3. Huberto M. Ennis & Todd Keister, 2008. "Understanding monetary policy implementation," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 94(Sum), pages 235-263.
    4. Todd Keister & James J. McAndrews, 2009. "Why are banks holding so many excess reserves?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Dec).
    5. Paul Bennett & Stavros Peristiani, 2002. "Are U.S. reserve requirements still binding?," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 53-68.
    6. Todd Keister & Antoine Martin & James J. McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 41-56.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Il mito del “finanziamento monetario” della spesa pubblica
      by keynesblog in Keynes Blog on 2012-12-13 20:30:07

    Citations

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    Cited by:

    1. Diana Hancock & Wayne Passmore, 2012. "The Federal Reserve's portfolio and its effects on mortgage markets," Finance and Economics Discussion Series 2012-22, Board of Governors of the Federal Reserve System (U.S.).
    2. Lawrence L Kreicher & Robert N McCauley & Patrick McGuire, 2013. "The 2011 FDIC assessment on banks managed liabilities: interest rate and balance-sheet responses," BIS Working Papers 413, Bank for International Settlements.
    3. Jose M. Berrospide, 2013. "Bank liquidity hoarding and the financial crisis: an empirical evaluation," Finance and Economics Discussion Series 2013-03, Board of Governors of the Federal Reserve System (U.S.).
    4. Robert N McCauley & Patrick McGuire, 2014. "Non-US banks' claims on the Federal Reserve," BIS Quarterly Review, Bank for International Settlements, March.
    5. Tarron Khemraj & Christian R. Proaño, 2011. "Excess Bank Reserves and Monetary Policy with a Lower-Bound Lending Rate September 2011," Working Papers 1104, New School for Social Research, Department of Economics.
    6. John C. Williams, 2011. "Economics instruction and the brave new world of monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue june6.

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    More about this item

    Keywords

    Bank loans; Interest; Bank reserves;
    All these keywords.

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