Question

Why would a bank usually want to minimize the amount of excess reserves it has on hand?

Answer 1

Excess reserves are funds over to required reserves.

Excess reserves typically don’t earn any returns as they are resting in bank or in its bank accounts.

Excess reserves drop in value on time scale and bank typically don’t want such deterioration to happen. Keeping time value of money in view no entity would like to keep excess funds in their treasury.

If a bank poses excess reserves on regular basis then that is not liked by shareholders of the bank. Shareholders generally see as value deterioration of their stocks as funds are not utilized to earn minimum required returns.

Considering above arguments banks generally avoid posing excess reserves.

Note: In times of wide spread market financial distress, banks keep excess funds to tackle illiquidity and that is justified.