Bank Lending in Times of Large Bank Reserves∗
Bank Lending in Times of Large Bank Reserves∗ Antoine Martin,a James McAndrews, and David Skeieb aFederal Reserve Bank of New York bMays Business School, Texas A&M University Reserves held by the U.S. banking system rose from under $50 billion before 2008 to $2.8 trillion by 2014. Some econo- mists argue that such a large quantity of reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve’s interest rate policy. In con- trast, we show that the amount of bank reserves has no effect on bank lending in a frictionless model of the current bank- ing system, in which interest is paid on reserves and there are no binding reserve requirements. Moreover, we find that with balance sheet costs, large reserve balances may instead be contractionary. JEL Codes: G21, E42, E43, E51. ∗This paper is a revision of Federal Reserve Bank of New York Staff Report No. 497, May 2011 (revised June 2013), and was previously circulated with the title “A Note on Bank Lending in Times of Large Bank Reserves.” The authors thank Todd Keister for valuable conversations that contributed to this paper; John Cochrane, Doug Diamond, Huberto Ennis, Marvin Goodfriend, Ellis Tallman, Steve Williamson, Steve Wolman, and the discussants of the paper, Morten Bech, Jagjit Chadha, Lou Crandall, Oreste Tristani, and Larry Wall, for helpful sugges- tions and conversations; the editor John Williams and two anonymous referees for very helpful comments; participants at the 2011 IBEFA/ASSA meetings, the 2013 Federal Reserve System Committee Meeting on Financial Structure and Regula- tion, the ECB conference on “The Post-Crisis Design of the Operational Frame- work for the Implementation of Monetary Policy,” the Swiss National Bank con- ference on Policy Challenges and Developments in Monetary Economics, and at seminars at the Bundesbank, the Federal Reserve Bank of New York, the Federal Reserve Board, and the Swedish Riksbank for helpful comments; and Sha Lu and particularly Ali Palida for outstanding research assistance.
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