Over the past four years, the US Federal Reserve has reduced the surplus central bank reserves that it had built up under its quantitative easing programme. Over the same period, the Basel 3 banking regulations have, however, significantly increased banks’ demand for central bank liquidity. Before Basel 3, all reserves in excess of “required reserves”, in the monetary policy sense of the term, were, justifiably, treated as excess reserves. Since the new liquidity rules have come into force, only those reserves in excess of the regulatory constraint may be so treated
