Why has the development of overnight loans made it more likely that banks will hold fewer cash reserves?
When banks are able to get quick access to "fed funds" (overnight loans from banks with excess cash balances), the overall level of reserves tends to come down. Banks don't need to keep extra reserves to meet unexpected draw-downs if they can quickly obtain them from elsewhere, and banks with temporary excess reserves can deploy them in the form of loans to creditworthy banks with overnight needs.
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When banks are able to get quick access to "fed funds" (overnight loans from banks with excess cash balances), the overall level of reserves tends to come down. Banks don't need to keep extra reserves to meet unexpected draw-downs if they can quickly obtain them from elsewhere, and banks with temporary excess reserves can deploy them in the form of loans to creditworthy banks with overnight needs.
