That’s the question posed by a recent staff report from Todd Keister and James McAndrews at the New York Federal Reserve.
Their answer? Because the Federal Reserve has been really, really busy.
Keister and McAndrews begin their analysis by documenting the remarkable increase in excess reserves since the fall of Lehman:
Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically, as shown in Figure 1. Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Excess reserves spiked to around $9 billion in August 2007, but then quickly returned to pre-crisis levels and remained there until the middle of September 2008. Following the collapse of Lehman Brothers, however, total reserves began to grow rapidly, climbing above $900 billion by January 2009. As the figure shows, almost all of the increase was in excess reserves. While required reserves rose from $44 billion to $60 billion over this period, this change was dwarfed by the large and unprecedented rise in excess reserves.
Some observers have expressed two concerns about the spike in excess reserves: