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October 12, 2022

With Abundant Reserves, Do Banks Adjust Reserve Balances to Accommodate Payment Flows?

As a result of the global financial crisis (GFC), the Federal Reserve switched from a regime of scarce reserves to one of abundant reserves. In this post, we explore how banks’ day-to-day management of reserve balances with respect to payment flows changed with this regime switch. We find that bank behavior did not change on average; under both regimes, banks increased their opening balances when they expected higher outgoing payments and, similarly, decreased these balances with expected higher incoming payments. There are substantial differences across banks, however. At the introduction of the abundant-reserves regime, small domestic banks no longer adjusted balances alongside changes in outgoing payments. 

How Do Banks Manage Their Balances Given Payment Flows? 

A central aspect of banking is fulfilling obligations to other banks on behalf of clients as well as a bank’s own business. This is often achieved through the Fedwire® Funds Service, which allows banks to make immediate, large-value payments among themselves using central bank money, or reserves. (“Fedwire” is a registered service mark of the Federal Reserve Banks.)

Before the GFC, the Federal Reserve maintained a scarce-reserves regime, supplying banks with less than $50 billion of reserves in aggregate. Most banks faced the problem that total payments sent and received intraday were significantly larger than the banks’ opening balances, making overdrafts possible. To minimize overdraft costs, banks both carefully timed when they made payments intraday and strategically chose their opening balance. This last decision involves a trade-off: Larger opening balances reduce the chances of intraday overdrafts but incur opportunity costs because reserves can earn higher returns elsewhere (in the federal funds market, for example).

After the GFC, the Federal Reserve switched to an abundant-reserves regime and dramatically increased the level of reserves in the system. It also started to pay interest on account balances. With these changes, it is now an open question whether the strategic management of balances in response to payment flows remains of first-order importance to banks.  

How Do Balances and Payment Flows Compare? 

To answer this question, we use confidential account-level information on banks’ opening and closing balances, as well as the total daily value of credits and debits from that account by type of payments service. We focus on Fedwire credits and debits, aggregating all other transfers into an “other net change” variable where a bank’s closing balance is equal to its opening balance + Fedwire credit – Fedwire debit + other net change.

We start by considering the ratio of opening balances to the value of Fedwire debits (or payments sent by the bank). We define the pre-GFC, scarce-reserves regime as February–May of 2007 and the post-GCF abundant-reserves regime as the same four months in 2015, shortly after the end of the Federal Reserve’s third period of quantitative easing in October 2014. We find that the distribution of the ratio of opening balances to Fedwire debits is dramatically different across these two periods. In 2007, these ratios were much more concentrated near zero, and the median was equal to 0.27, meaning that the median bank held an opening balance that was 27 percent of the total daily value of outgoing Fedwire payments. Clearly, then, banks relied on incoming payments to fund outgoing payments, a point examined more closely in this 2014 Liberty Street Economics post and this working paper. In 2015, by comparison, the ratios of opening balances to Fedwire debits shifted rightward, with the median value equal to 11.06. This large shift suggests that banks might no longer need to worry about funding their outgoing debit payments with incoming credit payments. 

Banks differ substantially in how they choose opening balances. To show this, we first divide banks between foreign and domestic, and then further divide domestic banks into small, medium, and large based on their daily gross Fedwire transfers (credit plus debit). We label the top ten banks as large, the forty next largest as medium, and the remaining domestic banks as small. We then examine the distribution of the ratio of opening balances to Fedwire debits in both periods across banks (see the table below). Particularly striking is that small domestic banks have higher ratios in both regimes, and that in the abundant regime their balances are much larger than payment outflows.

Ratio of Opening Balances to Fedwire Funds Debits by Bank Size

YearBank Type25th50th75th
2007Small domestic0.0550.2891.394
Medium domestic0.0040.0080.017
Large domestic0.0010.0020.005
2015Small domestic2.09412.28961.409
Medium domestic0.2351.0001.442
Large domestic0.1610.2920.903
Source: Federal Reserve Bank of New York.

A More Formal Analysis

We more formally explore the relationship between balances and payments using regression analysis. For each regime and across bank types, we regress opening balances on Fedwire credits, Fedwire debits, and the constructed net other change variable. We include bank and day fixed-effects to control for average differences across individual banks and for daily aggregate shocks, and cluster standard errors by bank.

The coefficient estimates from the scarce-reserves regime demonstrate a strong and statistically significant association between changes in Fedwire payment flows and opening balances. The estimates imply that a one dollar increase in Fedwire debits is associated with a $0.509 increase in opening balances. Further, a one dollar increase in Fedwire credits is associated with a $0.505 decrease in opening balances, illustrating a symmetry in how banks weigh incoming and outgoing Fedwire payments when making decisions about opening balances. Finally, an increase (or credit) of one dollar from other transfer services (such as ACH or Fedwire Securities Service) is associated with a $0.503 decrease in opening balances.

The estimated coefficients only change slightly across the different bank types, suggesting that banks may be following similar strategies when adjusting their opening balances in response to changes in expected payment flows.

We now turn to the estimated coefficients from the abundant-reserves regime. Contrary to expectations that opening balances would be less strongly associated with payment flows, the estimated coefficients for the specification including all banks finds that opening balances continue to remain strongly associated with expected payment flows.

Although there are several differences across bank types, the most striking result concerns small domestic banks. Likely reflecting their high ratios of balances to debits described earlier, small domestic banks no longer seem to adjust their opening balances in response to expected changes in Fedwire debits. They do, however, decrease their opening balances almost 1 for 1 with respect to increases in Fedwire credits. 


The 2015 results for small domestic banks are in line with the intuitive idea that (much) larger opening balances can lessen the strength of the connection between payment flows and balances. An abundance of reserves, then, can lessen a central constraint on intraday liquidity faced by banks.

Our results should be considered with care, however, as even though a bank may appear to have a large enough opening balance to satisfy its payment obligations, those balances may not be available for use. Rather, balances may be used by banks to satisfy internal or regulatory intraday liquidity requirements, or otherwise be reserved for other uses that preclude them from being used to fund payment flows (as noted elsewhere, including in this 2021 Liberty Street Economics post). Indeed, in 2015, many medium and foreign banks held balances that were on average larger than their Fedwire debits, and yet we continue to find a strong statistical association between payment flows and opening balances for both types of banks.

Perhaps more tellingly, when we re-estimate the regressions detailed above for the same four months in 2021, when aggregate reserves are greater than $3 trillion, the estimated coefficients across all types of banks are statistically significant and imply that changes in Fedwire payment flows were strongly associated with changes in opening balances—results that are in line with those from the 2007 scarce-reserves regime. As argued in this recent paper, a difference between 2015 and 2021 might be that over those seven years banks may have responded to the Fed’s abundant-reserves regime by writing a variety of claims on their reserve holdings, perhaps making these holdings unavailable for use to fund payment obligations.

Photo: portrait of Adam Copeland

Adam Copeland is a financial research advisor in Money and Payments Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.  

Catherine Huang is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Kailey Kraft was a summer intern in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this post:
Adam Copeland, Catherine Huang, and Kailey Kraft, “With Abundant Reserves, Do Banks Adjust Reserve Balances to Accommodate Payment Flows?,” Federal Reserve Bank of New York Liberty Street Economics, October 12, 2022,

The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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