Tiered reserve remuneration reduces bank cash demand
The guest argued that the Fed could disincentivize banks from hoarding excess reserves by implementing a tiered interest rate system on reserve balances.
The argument
Currently, the Fed pays a flat, attractive market interest rate on all reserve balances, turning reserves into a risk-free investment for banks like JPMorgan. By adopting a model similar to the Reserve Bank of New Zealand - paying market rates only up to a threshold and a lower rate on excess balances - the Fed would encourage banks to shed excess reserves.
The thesis, stress-tested
✓ What validates it
- ✓Fed governors or researchers publish papers discussing tiered remuneration of reserves
- ✓The Fed adjusts its operational framework to introduce a multi-tiered interest on reserve balances (IORB) rate
▸ Risks discussed
- ▸Dropping interest rates on excess reserves could complicate the Fed's primary monetary policy transmission mechanism
- ▸Banks might push capital into riskier money market instruments to chase yield
Hear it yourself
"So by doing this, the Reserve Bank of New Zealand lowered the demand for reserve balances without impairing its ability to implement monetary policy and without messing up the ability of banks to meet their payment needs because they, you know, they got full freight interest on the amount they needed to run their business, and the rest…"
00:00 / 00:26
AFFILIATE LINK · ZORTIX MAY EARN A COMMISSION · NEVER A RECOMMENDATION TO TRADE