Excess reserves

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Excess reserves are bank reserves in excess of the reserve requirement set by a central bank (in the United States, a Federal Reserve Bank; in Canada, the Bank of Canada). Holding excess reserves is generally considered costly and uneconomical as no interest is earned on the excess amount. Therefore, many banks minimize their excess reserve amounts by putting them to more productive use. For banks in the Federal Reserve System, this is accomplished by making short-term (usually overnight) loans on the federal funds market to banks who may be short of their reserve requirements. However, some banks may choose to hold their excess reserves in order to facilitate upcoming transactions or meet contractual clearing balance requirements.