St Louis Fed Promotes Still More Free Money For Banks (And Hiding It All)

-edited

St Louis Fed researchers concocted a scheme to pay banks still more free money, but this time hiding all of it.

At the current rate of 2.35%, the Fed hands out about $33.58 billion in free money to the banks.

Interest Rate on Excess Reserves

The two charts show the moving target.

Excess reserves peaked at $2.7 trillion in August of 2014 but the interest rate on excess reserves then was only 0.25%.

0.25% of $2.7 trillion is "only" $6.75 billion in free money at an annualized rate. At the current rate, banks take in over $33 billion in free money.

The peak annualized rate was probably in August of 2017 with the interest on excess reserves at 1.95% on $2.2 trillion. That's free money to the tune of $42.9 billion at an annualized rate.

St. Louis Fed Proposal

Please consider Why the Fed Should Create a Standing Repo Facility by David Andolfatto, Senior Vice President and Economist, Federal Reserve Bank of St. Louis; and Jane Ihrig, Associate Director and Economist, Federal Reserve Board of Governors.

Market participants are projecting ample reserves in the $1 trillion range—a level much higher than their precrisis average of approximately $20 billion.

Why should banks prefer reserves to higher-yielding Treasuries? One explanation is that Treasuries are not really cash equivalent if funds are needed immediately. In particular, for resolution planning purposes, banks may worry about the market value they would receive in the sale of or agreement to repurchase their securities in an individual stress scenario.

The Fed could easily incentivize banks to reduce their demand for reserves by operating a standing overnight repurchase (repo) facility that would permit banks to convert Treasuries to reserves on demand at an administered rate. This administered rate could be set a bit above market rates—perhaps several basis points above the top of the federal funds target range—so that the facility is not used every day, but only periodically when a bank needs liquidity or when market repo rates are elevated.

With this facility in place, banks should feel comfortable holding Treasuries to help accommodate stress scenarios instead of reserves.

Treasury Sales On Demand - Guaranteed Bid

Lovely. The Fed proposes a facility that would allow banks to hold higher yielding treasuries instead of holding excess reserves, by guaranteeing a bid for the treasuries.

Sweet Spot

Given the inverted nature of the yield curve in many spots there isn't all that much to gain, but there is some.

The current sweet spot in this scheme is the 6-month T-bill. It yields about 10 basis points or so more than the 2.35% the Fed currently pays on excess reserves.

Annualized Value

The annualized value of the proposed scheme is only $1.4 billion. Still, that's nothing to sneeze at.

Hidden Beauty

Please don't forget about the hidden benefits.

Like what?

See if you can figure it out before reading further.

Poof!

There are no longer any excess reserves.

Banks get to buy treasuries with a guaranteed bid. So they do. En masse. In a flash, the top chart will look like it did in 2005, with everything seemingly back to normal.

Judging from the top chart, one has to wonder how much this has been front-run already, above and beyond stated tapering, now on hold.

Mike "Mish" Shedlock

Comments (28)
No. 1-15
Greggg
Greggg

Your M3 money at work.

mark0f0
mark0f0

The banks have to pay for the funding that they "deposit" to the Fed. And they're generally paying more than Fed Funds and T-Bills.

So I don't see how this is 'free money' for the banks. If anything, it costs the banks' shareholders to place deposits into this facility.

If the Fed were to eliminate this program, then the banks would either return funds to depositors, or the banks would buy T-Bills.

Mish
Mish

Editor

Of course it's free money The Fed pads its balance sheet giving the banks money. The banks park the money ate the Fed at 2.35%. The proposal is to give the banks still more

Mish
Mish

Editor

The banks DO NOT have to pay for the funding that they "deposit" to the Fed. It was literally FORCED on them via QE

FromBrussels
FromBrussels

I don t quite get this, american banks do pay their depositors, don t they, so what s left of that 2,35% 'profit' ?

mark0f0
mark0f0

@Mish Of course they pay for funding. Do you think the banks just borrow from their depositors "for free"? Generally they're paying a rate that exceeds that of T-Bills. Otherwise, depositors would simply buy T-Bills instead.

JonSellers
JonSellers

Of course the other option would be for the Fed to simply pay far less of a percentage on the excess reserves. Say, 0.25% instead of 2.35%. The interest rate paid has just marched up with the FFR.

QE should have been handled as a repo, taking assets off of banks balance sheets and replacing them with cash at par during the height of the panic. Then, when the economy turns around, putting those assets back and destroying the cash.

Webej
Webej

To be fair, banks earn money on interest rate differentials, which is hard in a Zirp world. They also have more (interest rate) risk on their assets in a world with depressed interest rates. So the Fed is helping them out, that's the function of the Fed. You might ask, Why do they get help when others get to go bankrupt or earn practically nothing on their savings? Well, that's a good question. The whole playing field is always tilted in favor of privileged parties that helps funds trickle their way, but all such measures are always justified by referring to the supposed greater good for the "economy" at large.

Bam_Man
Bam_Man

The US Treasury complex is their “Citadel”. Uncle Scam, the Fed and its TBTF member banks will collude to ensure that there is ALWAYS a bid for Treasuries. Looking at Japan, you can see just how this will work (until it doesn’t). It is stealth MMT.

ksdude
ksdude

Why dont you jackasses hide some my $ in my account? What a racket. Not to mention a lot of BS. This is like being a young kid playing board games and making up rules as you go to always keep yourself ahead. I would ask at what point does everything they say and do become complete nonsense but im pretty sure were long past that.

everything
everything

No secret that banks are subsidized, they are like middle men, also gamblers, skimmers, and wheel greasers. My CU pays me 1 tenth of a point interest rate, but other banks want the deposits and will pay 2%+ currently. Obviously we are living in more "free money" times than anytime before. Banks seem very loose right now, and many are back to HELOC'ing their futures again. With lower margins, and unemployment at 50 year lows, their is no shortage of lendees and subprime loans, even with lower rates, they can just lend more out, they make most of their money on the front end of their loans so they don't really care to much if people pay their loans off or not. The debt piles are so big, even small returns add up. If they are getting money from the fed/government so what, who isn't these days, government borrowing is what's floating us, i.e. a trillion a year goes toward defense and medicare.

Mish
Mish

Editor

"I don t quite get this ..."

When the Fed did QE - It did not come from deposits. It handed the banks $2 Trillion. The banks had no choice - they had to take it.

The banks had no real use for it. So they deposited the money back at the Fed at the stated rates in the chart.

YES IT WAS FREE MONEY

Contrast to the ECB policy of negative rates. The Fed slowly recapitalized banks over time. Negative interest rates meant EU banks had to pay the ECB to park funds!

BTW, the deposit rate is still close to zero in the US. In the eurozone it is negative. The ECB thought they could force consumers to spend. It did not work.

Mish
Mish

Editor

  1. Once again Banks did not pay any depositors to get the money.
  2. The Fed, via QE, forced $2 trillion on the banks. That money sat as excess reserves on the balance sheets of banks.
  3. The Fed did not use to pay banks interest on excess reserves, only required reserves.
  4. At the request of Bernanke, on some made up lie, Congress allowed the Fed to pay interest on excess reserves.
  5. Then, when the Fed created $2T out of thin air and handed it to the banks, the banks parked that money back at the Fed as excess reserves and collected interest on it.
  6. The banks have to pay back the $2T, but on a schedule set by the Fed. That’s called “tapering”.
  7. In December, Powell said tapering was on auto pilot. The market threw a taper tantrum.
  8. Powell backed off tapering so reserves will sit at $1T or perhaps very slowly sink instead of sinking at the taper pace.
  9. Now the St. Louis Fed proposes a scheme that will effectively hide the amount of true excess reserves, giving banks more free money (interest if you prefer)
  10. Ain’t life grand?
Mish
Mish

Editor

Is this now totally clear?

Mish
Mish

Editor

Excellent comment by Maximus Minimus - Bringing it to the top

"Negative interest rates meant EU banks had to pay the ECB to park funds! And they pass the negative ioer on; the EU bank customers have to pay the bank to keep their money. How much more convoluted can it get?! You keep saying: the end must be nigh, but like circus actors, they keep the plates spinning."