The Strange Official Economics of Interest on Excess Reserves

In a note tomy last post, I observed thatLiberty Street Economics,the blog of Federal Reserve Bank of New York, promised a follow-up to its post addressingthe advantages of the Fed ’s interest payments onrequired reserves. The follow up would address the benefits of paying interest on banks ’excess reserves and of thereby establishing a “reserve-abundant regime.”That follow-up post has since appeared, under the title “Why Pay Interest on Excess Reserve Balances?” As I’d anticipated, it answers the question it poses by outlining some supposed benefits of having banks sit on immense piles of cash, without so much as hinting at the existence of any countervailing costs. As soon as those costs are considered, the supposed benefits turn out to be largely, if not entirely, fictitious.Real and Pseudo Reserve EconomiesAccording to the post ’s authors, Laura Lipscomb and Heather Wiggins (Board of Governors) and Antoine Martin (FRBNY), a major advantage of paying interest on excess reserves (IOER) is that, by ensuring that banks possess “a relatively abundant supply of [excess] reserves,” it “makes the U.S. payment system more e fficient.” Besides no longer having to rely “on intraday and overnight credit from the Fed,” the authors explain, banks made flush with reserves “are more willing to relinquish reserves early and are therefore engaging in less economizing and hoarding of reserves, making the payment system m ore efficient.”“Less economizingand ...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs