Reserve holding and bank lending

Banks’ ability to convert liquidity into lending depends crucially on the various regulatory constraints they face. This paper investigates the differential lending responses of banks with varying levels of reserves, and their impact on the real economy. The distribution of reserves within the banking system became significantly more dispersed during the quantitative easing (QE) periods. Loan growth for those more liquidity-constrained does not vary meaningfully with liquidity changes, despite abundance at the aggregate level. Consequently, our findings imply that the uneven bank reserve distribution may exacerbate the spatial disparities in bank lending and regional economic development through differential lending responses of banks in different parts of the reserve distribution. •The reserve distribution became more dispersed in the U.S. banking sector after QE.•High-reserve banks’ loan growth appears more responsive to changes in liquidity.•Results are robust to controlling for industry–market-specific demand trends.•Counties with more high-reserve banks experience more local business growth.•Cross-bank reserve dispersion could translate into disparity in regional recovery.