Excess Reserves in Australia: Impact on Banks and Borrowers 2025

Australia’s banking sector is no stranger to change, but 2025 is seeing excess reserves return to the spotlight. As the Reserve Bank of Australia (RBA) tweaks its monetary toolkit and economic conditions remain volatile, the role of excess reserves—those funds banks hold at the central bank above required minimums—has never been more critical. But what do these reserves mean for everyday borrowers, businesses, and the broader economy?

What Are Excess Reserves and Why Do They Matter?

Excess reserves refer to the cash commercial banks park at the RBA over and above the regulatory requirements. For much of the past decade, these reserves barely registered as a policy concern. That changed when the pandemic hit, and the RBA’s quantitative easing (QE) and Term Funding Facility (TFF) flooded the system with liquidity. Even as the RBA started unwinding QE in 2024, many banks continued to hold sizeable excess reserves in 2025, reflecting both ongoing caution and regulatory adjustments.

• Liquidity buffer: Banks use excess reserves to cushion against sudden withdrawals and market shocks.

• Influence on lending: High reserves can signal risk aversion, potentially slowing lending to households and businesses.

• Interest rate implications: The RBA pays interest on these reserves, setting a floor for market rates and influencing borrowing costs across the economy.

2025 Policy Updates: RBA’s New Approach to Bank Reserves

This year, the RBA has refined its approach to managing liquidity. With the unwinding of the TFF and a reduced government bond portfolio, the central bank has shifted its focus to the Interest on Exchange Settlement Balances (IESB). In March 2025, the RBA raised the IESB rate to 3.85%, aiming to keep the cash rate corridor tight and signal its intent to maintain financial stability amid global uncertainty.

Key policy highlights for 2025 include:

• Gradual normalisation: The RBA is reducing excess liquidity, but at a measured pace to avoid credit shocks.

• Enhanced transparency: Regular updates on banking system liquidity and reserve balances are now published each quarter.

• Potential macroprudential adjustments: Regulators are watching for signs of excess risk-taking as reserves decline and lending conditions shift.

These moves have a ripple effect on how banks manage their balance sheets—and how much credit they’re willing to extend to consumers and businesses.

How Excess Reserves Shape Lending and Savings in 2025

The level of excess reserves directly affects the financial ecosystem:

• For Borrowers: When banks are flush with reserves, lending standards can loosen, making it easier to get a home loan, business finance, or personal credit. But as reserves shrink, banks become choosier about who qualifies.

• For Savers: Higher reserves mean banks have less incentive to attract deposits, which can translate to lower savings rates. As the RBA tightens, deposit competition may heat up, benefiting savers.

• For Investors: Excess reserves often signal a cautious stance. Banks may favour holding risk-free assets over expanding loan books, affecting credit growth and share market sentiment.

Example: In early 2025, several mid-tier banks reported trimming their excess reserves to free up capital for small business lending. This pivot coincided with a modest uptick in SME loan approvals, especially in sectors like renewable energy and tech, where government incentives remain strong.

The Road Ahead: Risks and Opportunities for Australians

As the RBA continues to manage the delicate balance between stability and growth, excess reserves will remain a key metric to watch. For consumers and businesses, the main takeaways are:

• Expect lending criteria to evolve as banks adjust their liquidity buffers.

• Keep an eye on deposit rates, which may rise if banks need to attract more funding as reserves fall.

• Monitor RBA policy updates, especially around the IESB and liquidity management, for clues on the direction of interest rates and credit availability.

Ultimately, understanding the dynamics of excess reserves isn’t just for economists—it’s a practical tool for making smarter financial decisions in a changing landscape.