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The B.E. Journal of Macroeconomics

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Risk averse banks and excess reserve fluctuations

Brian C. Jenkins / Michael K. Salemi
Published Online: 2018-07-10 | DOI: https://doi.org/10.1515/bejm-2016-0120


We develop a model to study how risk averse banks use excess reserves to manage risk on their asset portfolios. Our model predicts that risk averse banks accumulate substantial holdings of excess reserves in response to large, low-probability shocks to the risk on loans. Our findings support the hypothesis that risk aversion led banks to build-up excess reserves within the US banking system in September of 2008 following news about the failure of Lehman Brothers and the credit downgrade of AIG. Moreover, our model also explains the magnitude of excess reserve fluctuations observed in the US over typical business cycles.

Keywords: banking; excess reserves; financial accelerator; monetary policy; new keynesian model


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About the article

Published Online: 2018-07-10

Citation Information: The B.E. Journal of Macroeconomics, 20160120, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2016-0120.

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