0
$\begingroup$

Is it possible for a commercial bank to independently increase their central banks reserves? If yes, how would they do it?

To be clear, when I say independently, I mean a bank would like to increase its central reserves but doesn't want to borrow them from other banks or the fed.

$\endgroup$
1
  • $\begingroup$ Of a bank could just create reserves lit of nothing we would never see bank failures... $\endgroup$
    – Alex
    Commented May 27, 2023 at 20:49

2 Answers 2

1
$\begingroup$

Private banks can turn any extra cash they have into bank reserves if they would want to. Bank reserves are just bank deposits at central bank.

So if bank would like to increase its bank reserves at central bank without borrowing it could raise money at a capital markets or in myriad of other ways and just deposit them at Fed.

$\endgroup$
2
  • $\begingroup$ When you say "myriad of other ways" could you give a detailed breakdown of what these other ways are, because that's what I want to know. $\endgroup$ Commented May 28, 2023 at 13:00
  • 2
    $\begingroup$ @troybeckett how can you expect me to provide detailed lists of how bank can raise money? There is literally too many to enumerate especially if you want granular detail as opposed to some large categories. They can pay their employees less, cut overhead costs, pay smaller bonuses, get more customers, reduce marketing spending, sell some old offices, reduce number of branches/ATM, pay less dividends etc... you can think of other ways yourself $\endgroup$
    – 1muflon1
    Commented May 28, 2023 at 15:02
0
$\begingroup$

Apart from all the ways already mentioned, the easiest thing a commercial bank can do to increase its bank reserves is to just sit and wait.

Every time the government spends, it instructs its central bank to credit the reserve balances held by commercial banks at the central bank (and as is often necessary for eg. pubic sector salaries, the commercial banks proceed to credit the deposit balances of the final beneficiaries).

Sure, tax collections returning to government will result in reserve balances being decreased but as I'm sure you know, most modern governments run a current account deficit each year. This means more reserves (and deposits) are spent into the system than are taxed back out of it.

But why would commercial banks want this? Usually they would much rather swap their excess reserves with government bonds which the government is all too happy to issue. These usually pay a greater interest rate.

$\endgroup$
5
  • $\begingroup$ Waiting doesn't always work. Waiting for the fiscal deficit to increase reserve balances only works if the central bank is buying the bonds issued to pay for the deficit. If they don't buy, then the money has to come from the private sector investors. Reserves of depository institutions at the Fed was 4.2 T USD in December 2021 and August 2023 reserves were 3.2 T USD. $\endgroup$
    – H2ONaCl
    Commented Oct 3, 2023 at 9:38
  • $\begingroup$ @H2ONaCl I don't know what you mean? Every day, the government spends by increasing reserve levels. If at the end of the day, less tax is returned to the Treasury than was spent, there is an excess of reserves in the system. This has nothing to do with bonds at this stage. $\endgroup$ Commented Oct 3, 2023 at 10:10
  • $\begingroup$ The U.S. Treasury is collecting taxes that are less than it is spending. That's why the Treasury is selling bonds. It needs to make up the difference. Sometimes the Fed will want to increase their holdings of those bonds and sometimes not. Right now, it is not. That's why the total reserves of all the commercial banks has been decreasing for the past 20 months. $\endgroup$
    – H2ONaCl
    Commented Oct 3, 2023 at 12:11
  • $\begingroup$ Here's the graph. fred.stlouisfed.org/series/TOTRESNS $\endgroup$
    – H2ONaCl
    Commented Oct 3, 2023 at 12:14
  • $\begingroup$ @H2ONaCl Once Gov bonds are issued to mop up excess reserves as a result of gov deficits, I agree that the central bank conducts open market operations to trade bonds on the secondary market. They buy bonds in QE to lower the inter-bank short term rate and buy bonds in QT for the opposite monetary effect. This is separate to my initial answer. Ultimately banks don't control their reserve levels but all things being equal, waiting for gov deficits to occur will leave excess reserves. Banks then choose to swap these with bonds to chase profit. $\endgroup$ Commented Oct 3, 2023 at 12:54

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.