What Are Excess Reserves?

Excess reserve refers to the portion of commercial banks and deposit-taking financial institutions' actual reserve in central bank deposit accounts that exceeds the legal reserve. Commercial banks are required to hold certain reserves for the deposits they absorb in their business activities, and their amount is first restricted by the legal reserve ratio.

Excess reserve

Excess reserves generally include

1,

1.Control liquidity

2,

Time adjustment content

1998-03-21 13% down to 8%

1999-11-21 8% down to 6%

2003-09-21 6% to 7%

2004-04-25 7% to 7.5%

2006-07-05 7.5% to 8.0%

2006-08-15 8.0% to 8.5%

2006-11-15 8.5% to 9%

2007-01-15 9% to 9.5%

2007-02-25 9.5% to 10%

2007-04-16 10% to 10.5%

2007-05-15 10.5% to 11%

2007-06-05 11% to 11.5%

2007-08-15 11.5% to 12%

2007-09-25 12% to 12.5%

2007-10-25 12.5% to 13%

2007-11-26 13% to 13.5%

2007-12-25 13.5% increased to 14.5%

2008-01-25 14.5% to 15%

2008-03-25 15% to 15.5%

2008-04-25 15.5% to 16%

2008-05-20 16% to 16.5%

2008-06-15 16.5% to 17% (1% at a time, implemented in two steps)

2008-06-25 17% to 17.5% (1% at a time, implemented in two steps)

Time reserve deposit interest rate excess reserve interest rate

1993-05-15 7.56% 7.56%

1993-07-11 9.18% 9.18%

1996-05-01 8.82% 8.82%

1996-08-23 8.28% 7.92%

1997-10-23 7.56% 7.02%

1998-03-21 5.22% 5.22%

1998-07-01 3.51% 3.51%

1998-12-07 3.24% 3.24%

1999-06-10 2.07% 2.07%

2002-02-21 1.89% 1.89%

2003-12-21 1.89% 1.62%

2005-03-17 1.89% 0.99%

2008-11-27 1.62% 0.72%

Excess reserve as

The implementation of the policy will help stabilize the expectations of market members and promote the stable operation of the bond market. This can be explained in two ways.

After the implementation of this policy, as the excess reserve ratio of commercial banks declines, the effectiveness of the central bank's open market operations will be improved, which will help the stability of the currency market and provide a stable environment for market members to invest in the bond market. With a low excess reserve ratio, a single pass of the central bank's base currency will effectively affect the bank's position, thereby affecting the level of interest rates in the money market. In this way, the central bank does not need to play too much "advancement" as it is now withdrawing currencies, causing large fluctuations in the money market; or increasing the amount of money withdrawing to recover the liquidity of market members, but the market is not obtained. Members' approval, such as the central bank issued the central bank bills in the last 3 times to withdraw funds, the current standard. The central bank can more accurately formulate the timing and intensity of open market operations, and while maintaining the smooth operation of the money market as far as possible, complete the dual goals of withdrawing currency and adjusting market interest rates. After market members have more stable expectations of the central bank's open market operations, it will also be easy to arrange bond investment plans.

After the implementation of this policy, the four major commercial banks, which have the most excess reserves, will have the incentive to find a suitable way for these idle funds. They will not wait for the repurchase funds to rise to a very high level before they are willing to release the funds. Instead, they will actively participate in the money market's fund operations on the basis of measuring short-term capital costs and benefits. This will help the smooth operation of the currency market. Other market members need not worry too much about the availability of money in the money market. They will choose the appropriate bond investment ratio according to their own asset-liability ratio situation, instead of selling the bonds regardless of cost to withdraw funds when the money market is short of funds, as in the past.

The implementation of the policy will open up the space for short-term yield reduction and increase long-term debt yield, which will help build a reasonable yield curve and optimize the investment structure of the bond market. In the past, the reserve interest rate of 1.89% was a risk-free interest rate for financial institutions. If the market interest rate is lower than this level, financial institutions would rather deposit it in the central bank. Therefore, the short-term yield is always limited by the reserve interest rate, and the short-term part of the term structure is difficult to fall, which is one of the reasons for the flat Chinese yield curve. After the reduction of the excess reserve interest rate, it will force commercial banks to release more of the excess deposit reserve held in their hands, thereby increasing the bond price by increasing the market money supply and causing money market interest rates (such as short-term repurchase ) And the decline in short-term yields on the national bond market. But for long-term debt, the situation will be more complicated. In the short term, as the supply of funds generally increases, there will be a certain increase in the price of long-term debt. However, with the implementation of floating loan interest rates by banks, taking the one-year term as an example, the adjusted maximum deposit-loan spread reached 7.05%. Such a high yield is quite attractive to the banks. Commercial banks' enthusiasm for investing in long-term debt has declined, and interest rates have risen. The final comprehensive result is a counterclockwise rotation of the yield curve, which changes the current imbalance in the structure of bond investment varieties.

Of course, due to the small intensity of the above policies, the actual impact on the bond market will also be limited. However, in any case, it is an important step in the marketization of interest rates. It will profoundly affect the operating environment of the bond market and the capital structure of the bond market, as will related policies that will be introduced in the future.