A bank's liquidity will decrease if its excess reserves rise. By reducing excess reserves in the system, raising the reserve requirement reduces lending activity.
What is excess reserve of a bank?
Capital reserves stored in excess of what is required by regulators, creditors, or internal controls are known as excess reserves by a bank or financial institution. Excess reserves for commercial banks are compared to standard reserve requirement amounts established by central banking regulators.
What is bank's liquidity?
The danger to a bank's earnings and capital posed by its inability to timely meet obligations as they become due without suffering intolerable losses is known as liquidity. The management of the bank must make sure that there are enough funds available at a fair price to satisfy any potential demands from both lenders and borrowers.
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