[jmherbener]

Bank reserves are cash banks hold in their vaults and checking account balances that banks hold at the Fed. The Fed requires banks to hold reserves against the checking account balances banks issue to their customers. Roughly speaking in normal times banks hold 5-10 percent of their customers’ checking account balances as reserves. Any amount of reserves that banks hold above those required by the Fed are called excess reserves. Currently banks hold well over 100 percent of their customers’ checking account balances as reserves.

The Fed cannot evaporate the cash that banks hold as reserves and dare not evaporate the banks’ checking account balances. If it did this, banks would lose a valuable asset and their equity would be jeopardized. The funds which are bank reserves were not loaned to the banks by the Fed but were payments the Fed made when banks sold some of their assets to the Fed.