How to Calculate Excess Reserves
Excess reserves equal total reserves minus required reserves, and they are the most a single bank can lend.
The Excess Reserves formula
Calculator
Enter total reserves, checkable deposits and the reserve ratio to get excess reserves and the lending they allow.
Vault cash plus deposits held at the central bank.
The deposit base the reserve requirement is applied to.
Enter 10 for 10%. A zero ratio would make the system multiplier infinite.
$10,000 is the most this one bank can lend right now, no matter how large the multiplier is.
- Required reserves
- $20,000
- Maximum the banking system can create
- $100,000
- Reserve position
- Excess reserves
The reserve ratio times checkable deposits, which is the floor the bank has to hold.
Once that loan is spent and redeposited, the whole system can support up to $100,000 of new deposits, which is 10 times the single bank's lending.
How to calculate Excess Reserves, step by step
- 1Find total reserves. Add the bank's vault cash to its deposits held at the central bank.
- 2Compute required reserves. Multiply the required reserve ratio as a decimal by checkable deposits.
- 3Subtract. Excess reserves = total reserves − required reserves.
- 4Read the result. A positive figure is what this one bank can lend now; a negative figure means it must borrow reserves to meet the requirement.
Worked example: Excess Reserves
A bank reports $200,000 in checkable deposits and $30,000 in total reserves, and the problem uses an illustrative reserve ratio of 10% (0.10). Required reserves = 0.10 × $200,000 = $20,000, so excess reserves = $30,000 − $20,000 = $10,000. That $10,000 is the maximum this single bank can lend.
Excess Reserves questions
Can one bank lend more than its excess reserves?
No. A single bank can lend only its excess reserves; the multiplied expansion happens across the whole banking system as that loan is spent and redeposited.
What do excess reserves do when a customer deposits cash?
Total reserves rise by the full deposit while required reserves rise by the ratio times the deposit, so the rest is excess. A $1,000 deposit at a 10% ratio adds $900 in excess reserves.
Why would a bank hold excess reserves on purpose?
Extra reserves cushion withdrawals and may earn interest. They also act as a leakage that makes the actual money multiplier smaller than 1 ÷ the reserve ratio.
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