A reserve that a bank creates (out of its monetary profits) and holds in excess of required reserves, minus monetary amounts borrowed from the central bank and used as reserves. Free reserves are part of a bank’s equity and may be available for distribution as dividends if its management would decide to do so. The higher the amount of free reserves the better a bank’s ability to extend credit (and create money).

Free reserves are the amount of money set aside at the discretion of a bank (i.e., voluntarily) in excess of required reserves. Free reserves serve as a first line to meet liquidity requirements and can be used for extension of more credit to the public.

Free reserves are also known as excess reserves.