St Louis Fed Discloses More Free Money: A Carry Trade in Liquidity

Not only do banks earn free money on excess reserves, they can borrow money and make guaranteed free money on that.

The Federal Reserve Bank of St. Louis discusses the Carry Trade in Liquidity.

> The IOER [interest on excess reserves] has been the effective ceiling of other short-term interest rates. The figure above compares the IOER with overnight rates on deposits and repos.

> As we can see, the IOER has mostly remained above these two rates, implying that (at least some) banks have been able to borrow funds overnight, deposit them at the Fed and earn a spread, in essence engaging in carry trade in liquidity markets.

Interest Rate on Excess Reserves

How Much Free Money?

Fed vs ECB

While the Fed has been busy giving banks free money by paying interest on excess reserves, banks in the EU have suffered with negative interest rates, essentially taking money from banks and making them more insolvent.

If the goal was to bail out the banks at public expense (and it was), it's clear Bernanke had a far better plan than the ECB.

Mike "Mish" Shedlock

Comments
No. 1-7
wootendw
wootendw

"...paying interest on excess reserves..."

I remember a time when, one of the biggest drawbacks of being a 'national' bank, was having to keep a non-interest-bearing account at the Fed.

It was sometimes used as an excuse for national banks to become state banks in order to get around Fed regulations (while ostensibly claiming it was to avoid having to maintain the non-interest bearing account at the Fed).

awc13
awc13

i want to start a bank to get some of that free money

Calvin Kramer
Calvin Kramer

In the land of free money.. Why do you think people are rushing the border, even the poor or starving know they can get a piece of it and at least be able to eat and find some kind of shelter. Why/how? Who is really pulling the strings, holding the larger economy up? Governments ability to create large piles of money, and the ensuing ease for the consumers to get a piece of it, because it's a consumer driven economy. Banks have always had it good here, always, they will figure out any loophole or create any kind of financial instrument they possibly can. They are the fractional lending money creators, and a super important part of the economic machine.

Stuki
Stuki

The Fed steals on behalf of their friends and clients, simply because they can. As long as they can steal, they will. As much as they can get away with. It's their institutional mandate.

They're no different than any other branch of the politico-legal "system." This is all "the system" that they keep telling their well indoctrinated, uncritical, pliant drones they must sacrifice everything to prevent from collapsing. Successfully too, sadly enough.

Neolib
Neolib

"As we can see, the IOER has mostly remained above these two rates, implying that (at least some) banks have been able to borrow funds overnight, deposit them at the Fed and earn a spread, in essence engaging in carry trade in liquidity markets."

I always thought the demand for overnight lending was zero during this time because banks would rather provision more excess reserves to get the higher rate the Fed pays out rather than lend on the fed funds market. Thoughts anyone?