Excess reserves

Holding excess reserves long term may have an opportunity cost if higher risk-adjusted interest can be earned by putting the funds elsewhere.

Banks may also choose to hold some excess reserves to facilitate upcoming transactions or to meet contractual clearing balance requirements.

Research by personnel at the Fed has resulted in claims that interest paid on reserves helps to guard against inflationary pressures.

[5][6] In comparison, the increase in reserve balances reached only $65 billion after September 11 attacks before falling back to normal levels within a month.

Former U.S. Treasury Secretary Henry Paulson's original bailout proposal under which the government would acquire up to $700 billion worth of mortgage-backed securities contained no provision to begin paying interest on reserve balances.

[7] The day before the change was announced, on October 7, 2008, Chairman Ben Bernanke of the Board of Governors of the Federal Reserve System expressed some uncertainty about it, saying, "We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target.

[10] The Congressional Budget Office estimated that payment of interest on reserve balances would cost the American taxpayers about one tenth of the present 0.25% interest rate on $800 billion in deposits: Beginning December 18, 2008, the Federal Reserve System directly established interest rates paid on required reserve balances and excess balances instead of specifying them with a formula based on the target federal funds rate.

"[15] Also on January 13, 2009, Financial Week said Mr. Bernanke admitted that a huge increase in banks' excess reserves is stifling the Fed's monetary policy moves and its efforts to revive private sector lending.

[16] On January 7, 2009, the Federal Open Market Committee had decided that, "the size of the balance sheet and level of excess reserves would need to be reduced.

It also will have to scale back the use of emergency lending programs and reduce the size of the balance sheet and level of excess reserves.

St. Louis Fed president James B. Bullard said, "paying them something of the order of $50 billion [is] more than the entire profits of the largest banks."