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Better than risk‐free: Reserve premiums and bank lending

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  • Raymond Kim

Abstract

When the Federal Reserve first paid interest on excess reserves (IOER) in October 2008, banks faced a choice to earn a “better than” risk‐free rate, or lend to earn a higher, riskier rate. Evidence suggests the “reserves‐lending puzzle” is not driven by endogeneity from reverse causality, flight to safety, or increased Treasury supply, but by the introduction of the “reserve premium” (IOER‐3MT), which is associated with a reduction of domestic bank‐level lending by ‐5.1% (‐$420.2B). Findings suggest the reserves risk channel can aid in restricting inflation. Additionally, recent Senior Financial Officer Surveys corroborate the conclusions presented in this paper.

Suggested Citation

  • Raymond Kim, 2025. "Better than risk‐free: Reserve premiums and bank lending," The Financial Review, Eastern Finance Association, vol. 60(2), pages 541-571, May.
    • Handle: RePEc:bla:finrev:v:60:y:2025:i:2:p:541-571
    DOI: 10.1111/fire.12421
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