Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late 1990s

Kazuo Ogawa

Journal of Money, Credit and Banking, 2007, vol. 39, issue 1, 241-257

Abstract: We investigated, empirically, why Japanese banks held excess reserves in the late 1990s. Specifically, we pin down two factors explaining the demand for excess reserves: a low short-term interest rate, or call rate, and the fragile financial health of banks. The virtually zero call rate increased the demand for excess reserves substantially, and a high bad loans ratio largely contributed to the increase in excess reserve holdings. We found that the holdings of excess reserves would fall by two-thirds if the call rate were to be raised to its level prior to the adoption of the zero-interest-rate policy, and the bad loans ratio were to fall by 50%. Copyright 2007 The Ohio State University.

Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:39:y:2007:i:1:p:241-257

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