Excess reserves refer to the amount of reserves that a bank holds beyond the required minimum set by regulatory authorities. In many banking systems, central banks require commercial banks to maintain a certain percentage of their deposits as reserves, which can be held either as cash in their vaults or as deposits with the central bank.
Excess reserves are the funds that exceed this required level and can be used by banks for various purposes, such as making loans or investing in other assets. Holding excess reserves can indicate that banks are being cautious, possibly due to uncertainty in the economic environment or lack of profitable lending opportunities. Additionally, during times of economic stress, banks may prefer to maintain higher levels of excess reserves to ensure liquidity.