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 (12)
No. 1-6
flubber
flubber

A far better plan would have been to allow market forces to determine the fate of the banks. If I can go bankrupt, why can't the banks?

lol
lol

there's so much fraud ,counterfeiting ,manipulation ,propaganda,blatant fraud,bait n switch phony accounting goin on inside the Eccles building now that if the fed was ever audited it would Enron/WorldCom/fannie/Freddie/leghman/madoff seem like childs play compared to the chit those folks are getting away with!

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?

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.

awc13
awc13

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

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).