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A $1 million increase in new reserves will result in an increase in the money supply of less than $5 million.
What happens if the amount of excess reserves in the banking system rises?
A financial institution's excess reserves can be raised, improving its credit rating. Since the stored cash or deposit is not invested to provide higher profits, especially over the long term, higher excess reserves also result in higher opportunity costs.
Banks voluntarily retain some extra reserves notwithstanding the 20 percent reserve requirement. The money supply will increase by less than $5 million for every additional $1 million in new reserves.
Therefore, Increased excess reserves can increase a financial institution's credit rating.
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