Excess reserves are the total reserves minus the required reserves in a bank, according to class notes from the State University of New York at Oneonta. Required reserves are a certain percentage of demand deposits calculated using a required reserve ratio.
For example, a bank's total reserves are $50 million and required reserves are $12 million, which means the excess reserves are $38 million. Required reserves are calculated by taking the required reserve ratio multiplied by the total of the demand deposits in the bank. If this same bank has $150 million in deposits, and the required reserve ratio is 8 percent, the total required reserves are $12 million, notes SUNY Oneonta.
The Federal Reserve sets the required reserve ratio for banks based on certain criteria. As of December 2014, the required reserve ratio for banks with liabilities between $14.5 million and $103.6 million is 3 percent. Banks with higher amounts of liabilities must maintain 10 percent in required reserves, according to the Board of Governors of the Federal Reserve System.
A bank's total reserve requirement is the sum of the amount reserved at 3 percent and the amount reserved at 10 percent. Reserves are computed weekly or quarterly by taking a 14-day period and calculating how much cash the bank should have on hand in the vault, explains the Board of Governors of the Federal Reserve System. If a financial institution does not have enough cash in the vault to maintain its reserves, the Federal Reserve places a reserve balance requirement on the bank.