If the federal funds rate is higher than the excess reserve rate, banks should be more willing to use the funds for inter-bank lending rather than deposit them with the central bank, but this is not absolute. Banks always have various considerations, instead of investing all their money in the case of high interest rates. Therefore, this is a proportion problem when banks make decisions: if the federal funds interest rate falls, it only means that more funds are invested in the central bank and less funds are used for interbank lending. This is a question of change rather than absolute quantity, so the demand for reserves has increased.

The excess reserve interest rate is the federal funds interest rate, that is, the lower limit of interbank lending rate. If the interest rate of federal funds is lower than this lower limit, the interest rate of borrowing funds from other banks or central banks will be lower than the interest rate deposited in the central bank in the form of excess reserves, that is, the interest received by depositing excess reserves >; In this case, all banks will choose to deposit more money as excess reserve in the central bank to collect interest, or even borrow money from the central bank or other banks (if other banks are willing) as excess reserve, so as to realize risk-free arbitrage of loan interest rate difference, so the federal funds interest rate must be greater than the excess reserve interest rate.

Now consider the case where the federal funds rate is higher than the lower limit. Interbank lending rate can be regarded as the opportunity cost of saving money as excess reserve. With the decline of interbank lending rate, the interest received by loans is getting less and less, and the opportunity cost is getting smaller and smaller. Banks are more willing to save money as excess reserves.

Let's make it clear here first. It's not that you will not lend at all if you put money into the excess reserve. It's just a matter of capital allocation, not too absolute.

The deposit reserve of China commercial banks in the Federal Reserve Bank (that is, the central banking system) includes statutory reserve and funds exceeding the reserve requirements. The loan interest rate is called the federal funds rate. These funds can be lent to other member banks to meet their demand for short-term reserves.

The interest rate charged by commercial banks when providing loans to enterprises is the discount rate.