A reserve that a bank creates (out of its monetary profits) and holds in excess of required reserves, minus monetary amounts borrowed from the central bank and used as reserves. Excess reserves are part of a bank’s equity and may be available for distribution as dividends if its management would decide to do so. The higher the amount of excess reserves the better a bank’s ability to extend credit (and create money).
Excess reserves are the amount of money set aside at the discretion of a bank (i.e., voluntarily) in excess of required reserves. Excess reserves serve as a first line to meet liquidity requirements and can be used for extension of more credit to the public.
These reserves are also known as free reserves.
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