Excess Reserves Provide $38 Billion In Riskless Bank Profits A Year

By Anthony B. Sanders

No one was expecting any interest rate changes from The Federal Reserve yesterday, but I was hoping that The Fed was going to announce a reversal in their policy of paying interest to banks for depositing their excess reserves with The Fed as opposed to lending it out to businesses and individuals.

(Bloomberg) — The Federal Reserve left interest rates unchanged and stayed on course to hike in December despite recent jitters in financial markets and a critical president.

The U.S. central bank said “economic activity has been rising at a strong rate” and job gains “have been strong,” acknowledging a drop in the unemployment rate, while repeating its outlook for “further gradual” rate increases in its statement Thursday following a two-day meeting in Washington.

Risks to the outlook appear “roughly balanced,” the Federal Open Market Committee said, leaving that language unchanged from the prior meeting in late September. Inflation expectations, which have slipped slightly in recent weeks according to some measures, were described as “little changed, on balance,” the same as in the last statement.


Well, if risk is so roughly balanced, why do banks still have so much money parked at The Federal Reserve in the form of Excess Reserves?


There is $1.72 trillion of still nearly free money that banks got from their deposit customers and have in turn placed on deposit at the Fed earning currently 2.2% risk free. These “excess reserves” provide $38 billion a year in pure profit for banks, handed to them by the Fed.

Now, take Wells Fargo Bank.  They pay 0.05% on a 6 month Certificate of Deposit. But then The Fed pays Wells Fargo 2.2% on their excess reserves. Instant profit!!!


This helps US banks to remain profitable. And giddy.


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