Saturday, May 2, 2009

Ratio of time Deposits Desired by the public (2)

Research studies have shown that the excess reserve ratio of banks varies inversely with interest rates on loans and securities. That is, as interest rates on such earning assets increase, banks are willing to reduce their excess holdings of cash, even though the risk factor increases somewhat.
Disregarding the risk factor and uncertainty and assuming profit maximizing behavior on the part of commercial banks, excess reserve held by banks would be Zero. such excess reserve have fallen in recent years as a result of (1) higher interest rates,(2) lower valuation of risk, and (3) greater emphasis on profit maximizing behavior.

No comments: