Excess of Reserves, Shortage of Facts

Many people view excess reserves as proof that banks are hoarding cash rather than lending it.

It happened again at a recent House Financial Services subcommittee hearing on what Congress could do to get credit flowing to small businesses.

David Borris, an entrepreneur who was representing the Main Street Alliance, pointed lawmakers to the reserves banks keep with the Federal Reserve beyond the minimum requirements. "Those excess reserves represent money that could be out circulating in the economy on productive loans, including loans to small businesses," Borris testified. "Instead, those excess reserves are sitting at the Fed and the banks are collecting 0.25 percent interest for holding more money out of the economy."

But the reality is more complicated, and experts agree that huge amounts of reserves tell you little about...