Banks try to keep their level of excess reserves low because
they wish to maximize profits
Banks try to keep their level of excess reserves low because excess reserves represent idle funds that are not being used to generate additional income. Excess reserves earn only a very low rate of interest from the Federal Reserve and as such, keeping a high level of excess reserves represents an opportunity cost for banks. Besides, holding more excess reserves than required by regulations can also increase the bank’s exposure to interest rate risks and reduce their liquidity. Therefore, banks prefer to use their excess reserves to make loans or investments to earn additional income that can generate a return on investment. In summary, for banks, excess reserves represent a cost of holding idle funds rather than an opportunity to earn additional income.
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