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asked ago in General Economics Questions by (140 points)
The Federal Reserve was granted the right to pay interest on reserves in 2006 with power to do so starting in 2011. The GFC did speed things up and they started doing so in 2008. Changing the system from a corridor to a floor system.                                                                                                                                              .                                                                                                                                                                                                                                                                                                                                                                                                                                                                 Under the new system reserves skyrocketed due to the LSAP program. Excess reserves which had been really scarce up until that point thanks to the money multiplier began to surge as such money multiplier stopped to function properly . Commercial Banks it seemed, opted to just watch the Reserves accumulate as the Fed was buying Treasuries. The Banking System as a whole, in fact, decided not to expand their loans and thus no extra deposits were created. This meant that the Excess Reserves could have been used as a base to expand loans and as loans expanded deposits would have also surged. Finally after a while the expansion in deposits would have caused Excess Reserves to support the right amount of deposits such as they would have not been Excess Reserves anymore, you'd have need every dollar of that to support the now much broader deposit base. Commercial banks decided not to do any of that. They were instead content just looking at Excess Reserves accumulating thanks to the LSAP and did not do anything on their own to expand loans (and deposits) to make those Excess Reserves actually Required Reserves .  Is there any study/papers out there investigating if Interest on Excess Reserves disincentivized Commercial Banks to make loans after the FED switched to the new floor system back in 2008
commented ago by (2.2k points)
This is an interesting point and I hope someone will link to the literature for you.

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