Contributing factor but not the root cause. Banks get paid 0.25% on excess reserves. If they can find better returns elsewhere than 0.25%, they'll try to conve

Contributing factor but not the root cause. Banks get paid 0.25% on excess reserves. If they can find better returns elsewhere than 0.25%, they'll try to convert those reserves into loans. 0.25% is better than nothing but still pretty awful ROI wise. The Fed started paying interest on reserves "to establish a lower bound of the federal funds rate (FFR)" - it's another way to limit downside and ensure what rate banks are lending reserves to each other (instead of having that rate be 0% because none of the banks actually want/need more reserves). The FFR is useless to the Fed as a tool when it reaches 0 "zero lower bound" and there is no demand for the inter-bank exchange of reserves. https://www.frbsf.org/education/publications/doctor-econ/2013/march/federal-reserve-interest-balances-reserves/ https://www.frbsf.org/education/publications/doctor-econ/201...