What do banks do with their excess reserves?
Banks use excess reserves to make loans to customers so that
they can make profits on the interest
Commercial banks cannot use excess reserves to make common
loans. They can only use them to make loans to other banks who may
need more required reserves. Excess reserves increase the monetary
base but do not enter the M1 or M2 money supply. The only entity
that can effect the total excess reserves is the Federal Reserve.
When the fed decides to reduce its balance sheet, it will sell
assets in the market and reduce an equal amount of excess
reserves.
Related Q&A：
What does excess mean？Oh, let me tell you what \excess\ means. Well, basically, \excess\ means more than what is needed or normal. For example, if you have an excess of food at a party, that means there's way too much food and it's more than people can eat. Or if you spend an excess amount of money, it means you spent way more than you should have. It often implies that there's an overabundance or a surplus of something. So, that's what \excess\ is all about! Hope that makes sense to you!
