Who has excess deposits at the Fed (and lose money on rate cuts)?
- Thread starter crgarcia
- Start date
Not exactly true. The Fed does not give overnight loans in the situation you describe, it is the banks themselves who have excess reserves with the Fed that lend it out which is what the federal funds rate covers. The rate cut has nothing to do with the Fed's money.
The rate cut makes the interbank lending rate lower so banks can borrow capital cheaper from other banks and have more money to lend out to the public and at lower rates.
Remember that the FED only sets a TARGET rate, the actual rate is set by the market of lending in between banks. That is why the actual rate has a high/low bid ask to it. When the FED changes its targets, its powers of persuasion are what make banks lend close to the target rate. No bank is going to try and fight the fed...
Who has excess reserve? Only the Fed and the bank itself know that. My guess is the more conservative banks have reserves.
Remember that the Fed consists of Member Banks...no foreigners...at least not in the legal sense (i.e. Deutsche, ABN, etc).
Correct me if I'm wrong here: FFR is from one institution to another and Discount Rate is from Fed to institution. Now, if the Fed requires a member bank to have 6% of capital on deposit with the Fed (of which 3% is kept at the bank but callable by the Fed), isn't the institution just borrowing against their own capital?
Banks try to manage their excess reserves on a weekly (actually, I think it might be a 2 week period) basis. They would like to keep only the required amount at the Fed, and no extra, because they earn nothing on the reserves held at the Fed. But they don't want to fall short, because they will be penalized if there is a shortfall. It is not easy to hit the target exactly, because your average big bank has billions of dollars going in and out on a daily basis. So, at the end of the reserve maintenance period, most banks will have a small amount of excess reserves at the Fed. Does that make sense?
They are required to have capital at the Federal Reserve. The bank does make a return on reserves, by the way.
http://www.federalreserve.gov/GeneralInfo/fract/sect05.htm
matador, I don't think the OP is talking about that at all. I believe he is referring to required reserves held at the Fed.
Here is an explanation, worded more clearly than I can do it myself:
Also, when you write:
Do you mean the Federal Reserve bank, or do you mean the member bank that has reserves at the Fed? Banks holding required reserves at the Fed do not earn interest on those reserves.
Here is an explanation, worded more clearly than I can do it myself:
Also, when you write:
Do you mean the Federal Reserve bank, or do you mean the member bank that has reserves at the Fed? Banks holding required reserves at the Fed do not earn interest on those reserves.