Federal Reserve Bank of New York Responds to Excess Reserves at Banks

The Federal Reserve Bank of New York released a paper about the massive amounts of excess reserves that banks are packing onto their balance sheets.  Below is the link to the PDF:

http://www.newyorkfed.org/research/current_issues/ci15-8.pdf

More info on full post…..

A snippet from the conclusion:

We began this article by asking, Why are banks holding so
many excess reserves? We then used a series of simple
examples to answer this question in two steps. First, we
showed that the liquidity facilities and other credit programs
introduced by the Federal Reserve in response to the crisis
have created, as a by-product, a large quantity of reserves in
the banking system. Second, we showed that while the lending
decisions and other activities of banks may result in small
changes in the level of required reserves, the vast majority of
the newly created reserves will end up being held as excess
reserves. The dramatic buildup of excess reserves reflects the
large scale of the Federal Reserve’s policy initiatives; it conveys
no information about the effects of these initiatives on bank
lending or on the level of economic activity.

The paper is a little long winded, but the conclusions they come to  are interesting.  In a short sentence take away for me the excess reserves are a by product of the FEDs policy initiatives; along with the fact that the FED started paying interest on reserves in October 2008 to allow the central bank to have the ability to raise or lower these interest rates to curb inflation or deflation.  The writers make it clear that this is not simply hoarding by banks.  Whether you want to believe this or not is up to you … and I would like to hear any opinions.