John Heltman — Fed interest payments to banks are here to stay, Yellen says

Federal Reserve Chair Janet Yellen said Tuesday that the central bank should continue to use interest payments on member bank reserve balances as its primary means of affecting short-term interest rates, rebuffing calls to return to more conventional monetary policy tools....

American Banker
Fed interest payments to banks are here to stay, Yellen says

John Heltman

Zero Hedge — 40% Of The Fed's Interest On Excess Reserves Is Paid To Foreign Banks

Interesting factoid.

While we will reserve judgment, and merely point out that of the $100 or so billion in dividends and buybacks announced by US banks after the latest stress test a substantial amount comes directly courtesy of the Fed - cash that ultimately ends up in shareholders' pockets - we will note that the interest the Fed pays to foreign banks operating in the US who have parked reserves at the Fed, amounts to $10.4 billion annualized as of this moment.

This is a subsidy from the Fed, supposedly an institution that exists for the benefit of the US population, going directly and without any frictions to foreign banks, who - just like in the US - then proceed to dividend and buybacks these funds, "returning" them to their own shareholders, most of whom are foreign individuals.

While the number appears modest, it is poised to grow substantially as the Fed Funds rate is expected to keep growing, ultimately hitting 3.0% according to the Fed.

Indicatively, assuming excess reserves remain unchanged for the next 2-3 years and rates rise to 3.0%, that would imply a total annual subsidy to commercial banks amounting to $65 billion, of which $25 billion would go to foreign banks every year.

We wonder if this is the main reason why the Fed is so desperate to trim its balance sheet as it hikes rates, as sooner or later, someone in Congress will figure this out.

 Zero Hedge

40% Of The Fed's Interest On Excess Reserves Is Paid To Foreign Banks

Tyler Durden

Update on Term Deposit facility

Its been a few months since my earlier post discussing the Fed's new Term Deposit Facility. Since then, the scope of this program has grown significantly, with auctions growing from around $25 billion per week, to a massive $125 billion in last week's auction.

These term deposits are simply one-week CD's offered by the Fed. Participating depository institutions have their reserve accounts debited, and then re-credited 7 days later, plus the small, but free amount of interest. While each institution can only tender a maximum of $10 billion, the amount of participating institutions has more than doubled since March of this year-- from 27 to 58. Not surprisingly, this growth in participation follows the Fed's gradual raising of the rates it will pay, from 26 basis points in March, to 30bp just today. Not surprisingly, the 26bp auctions had fewer participants than the 29 bp auction, since many institutions likely figured that getting a one-basis point spread over what they receive on their excess balance accounts (25bp) was not worth the trouble. For now, the Fed has stated that 30 basis points will be the ceiling for this round of term deposit auctions, with the first 30bp auction set to go off today.

The size of this latest auction demonstrates the ease to which the Fed can drain reserves if it chooses to. It simply states the rate that it will pay on term deposits,  and accepts bids. Last week in a matter of hours, the Fed was able to drain $125 billion in reserves from the banking system, with no problems. It will be interesting to see how much higher the Fed may decide to pay on its Term Deposits, and how large these auctions may become as a result. Unfortunately, the Fed states on multiple TDF related pages that the auctions "are a matter of prudent planning and have no implications for the near-term conduct of monetary policy."

It remains to be seen if this statement holds true in the future, since it seems to me that these term deposits are an easier way of raising rates if the Fed needs to, as opposed to trying to sell off their securities portfolio and expose themselves to potential losses. From a political standpoint, it will certainly be easier to expand the TDF than to try and "unwind QE", as many analysts put it.

Frances Coppola — Floors and ceilings

No, this isn't a post about derivatives. It's about the relationship between reserves and safe assets. I think it is time I brought the two together and created a unified explanation of the behaviour of safe assets in the presence of excess reserves which earn a positive rate of interest....

It is not sensible to ignore non-banks in the conduct of monetary policy, especially in a financial system as disintermediated as that in the US. Both money and government debt are needed by the financial system: the balance between the two is currently distorted and this is having untoward effects, especially on the shadow banking system whose lifeblood is the collateral that is becoming scarce. A large part of the problem is the assumption that money is solely the responsibility of the central bank, and debt is about government financing. As I've said before, for a sovereign currency-issuing government neither of these is true.  Monetary and fiscal policy are both ways of managing money: they affect the economy in different ways because of the different institutions through which they work. And short-term government debt and currency are both "money" as far as financial markets are concerned.

The central bank is the lender of last resort - or perhaps more accurately, as Perry Mehrling suggests, the DEALER of last resort - for banks. And because non-banks don't have central bank support but can use government debt as a risk-free asset, effectively the Treasury is the lender or dealer of last resort for non-banks. Banks and non-banks together make up the financial system. Therefore we can regard fiscal policy as monetary policy applied to non-banks, and monetary policy as fiscal policy applied to banks. Interest rates are monetary taxes: taxes are fiscal interest rates. They do the same job on opposite sides of the bank/non-bank divide, i.e. controlling the total amount of "money" (in its broadest sense) in circulation. And there is of course a considerable overlap, since in reality the divide between banks and non-banks is entirely artificial: interest rate policy affects non-banks and taxation affects banks. Central banks and governments therefore are partners in the management of the financial system as a whole. 

Coppola Comment
Floors and ceilings
Frances Coppola
(h/t Andy Baltchford via email)