When the Federal Reserve sells T-bills in the open market,
these securities are bought by banks and used as reserves. there is no change in bank reserves because all balance sheets will balance. interest rates tend to fall and hence banks reduce their reserves. the Federal Reserve is paid in the form of bank reserves.
When banks held excess legal reserves prior to October 2008, they:
lost a chance to earn extra income. violated the regulations of the Federal Reserve. deprived customers of liquidity. probably were anticipating large losses on the loans they had made.
