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Analysis

Bank reserves

by Gabriel Stein

Mon 20 Jan 2014

Bank reserves Enlarge Chart loading Image

What the chart shows: The chart shows banks reserves with the Federal Reserve and the European Central Bank relative to the total

Why the chart is important: The growth of banks’ reserves (that is to say, deposits) with central banks have exercised both central bankers and economic comment. The concerns have generally followed a line of ‘why are reserves being built up instead of being lent?’, shifting to ‘what if banks lend out these reserves when we don’t want them to?’. These concerns are misguided. They are based on the erroneous view that banks have a pot of money, which they can either lend to companies and households, or deposit with the central bank. That is wrong. Banks do not need to have money in order to lend it out – they create money by the mere fact of lending it. The reserves were created by the central banks through their quantitative easing. They – the central banks – can destroy them at will by selling assets to the banks. If banks’ reserves building up were such a problem, it would seem that the euro area – where their share of the ECB’s balance sheet has dropped by about half over the past two years – would face a better outlook than the US – where reserves over the same period went from just above 50% to just below 605 of the Fed’s balance sheet. In fact, the US economic outlook is far better than that of the euro area. The whole reserves debate is a non-issue.

Chart and comments provided by Oxford Economics www.oxfordeconomics.com