It
fits the pattern of gratuitous bank enrichment perfectly, but this
time, the big beneficiaries of the Fed are foreign banks. A JPMorgan
analysis, cited by the Wall
Street Journal,
figured that in 2014 the Fed would pay $6.74 billion in interest to
the banks that park their excess cash at the Fed – half of that
amount, so a cool $3.37 billion, would line the pockets of foreign
banks with branches in the US.
This
is where part of the liquidity ends up that the Fed has been handing
to Wall Street through its bond purchases. Currently, the Fed
requires that
banks keep a minimum balance of $80.2 billion at the Fed. Banks can
keep up to $88.2 billion at the Fed as part of the “penalty-free
band.” In theory, as “penalty-free” implies, there’d be a
penalty on balances above $88.2 billion.
But the total balance was $2.66 trillion in
April, up from $2.62 trillion in March and from $1.83 trillion a year
ago. The balances in excess of the “penalty-free band” have
reached $2.57 trillion. The highest ever. The penalty on that?
Forget
that. The Fed’s raison
d’être is
to enrich the banks regardless of what the costs to the economy, the
rest of society, and savers. So instead of penalizing banks for these
excess reserves, it pays the
banks 0.25% interest not only on the required balances but also on
all other balances. Spread over the year 2014, as JPMorgan estimated,
interest payments on these balances would amount to $6.74 billion.
It’s a marvelous system. The banks’ cost of
funds, given the heroic efforts the Fed has undertaken to repress
interest rates, is near zero. Banks can borrow short-term from their
depositors – that’s you and me – and from money-market funds –
that’s you and me again – at near zero cost, so maybe 0.10%.
Instead of lending it out, banks put that money on deposit at the Fed
to earn 0.25%. It’s the laziest no-brainer in banking history. A
pure gift from the Fed.
But
there’s a kink. Non-US-charted banks with branches in the US
benefit even more. The Bank for International Settlements, the
umbrella organization for the world’s largest central
banks, revealed how
these non-US banks were taking advantage of the new FDIC insurance
charges on wholesale funding (borrowing from other banks, short-term
repos, or funding from affiliates outside the US). They’d figured
out that these extra costs didn’t apply to them. They only applied
to US-chartered banks.
The wider FDIC charge added 2.5 to 45 basis
points to the costs of large and complex US chartered banks’
short-term wholesale funding. The calculation is complex and its
result by bank is not disclosed, but the rate for the largest US bank
was said to be 8 basis points…. With wholesale rates of 10 basis
points or less, the new FDIC charge made bidding for such funds and
parking them at the Fed at 25 basis points unattractive for many
US-chartered banks but not to the US branches of foreign banks, which
pay no FDIC fee.
These “seemingly small regulatory
differences” at the FDIC, the report points out, turned the Fed
into a special profit center for non-US banks. In this chart from the
report, foreign banks’ balances parked at the Fed (blue area in
dollars, and red line in percent) started shooting up at the end of
2008, and by mid-2013, reached about 50%. It resulted in “massive
changes” in the balance sheets of internationally active banks.
As foreign banks took advantage of the laziest
no-brainer in history, the Fed’s money-printing and bond buying
regime led to an enormous inflow of money into the US – about $1.3
trillion so far. It’s the risk-free banking version of the hot
money. And the $2.6 trillion in excess reserves that economists are
expecting to flow into the US economy sooner or later to really stir
things up? Half of it is that hot money. It won’t ever flow into
the US economy. It won’t fuel the “escape velocity” that has
been forecast for five years in a row. It’ll dissipate.
The
Fed has an excuse for
this banking gravy train: “eliminate effectively the implicit tax
that reserve requirements used to impose on depository institutions,”
it said. OK, I get it, concerning the “penalty-free” $80.2
billion that banks are required to deposit at the Fed. Fine. Pay them
0.25% on that. I don’t get paid that much on my money at the bank.
But what the heck. Let’s not quibble over pocket change, which is
what billions have become to the megabanks these days. But what about
the annual interest on $2.6 trillion in excess reserves?
Ah, the Fed has an excuse for that too: it’s
of course – I mean, how could I possibly not think of this on my
own? – “an additional tool for the conduct of monetary policy.”
A policy whose goal it is to fan reckless speculation, inflate asset
bubbles, enrich the banks and those who run them at the expense of
savers, and douse the entire neighborhood, namely Wall Street, with
free money.
Under
this relentless regime, the labor force participation rate has
shriveled to 62.8%. You have to go back to February 1978 to see
worse. It’s a terrible indictment of the Fed’s policies that
favor capital over labor, Wall Street over savers. New Zealand’s
central bank didn’t follow the Fed’s lead in monetary policy. And
there, the labor participation rate just set a new record high.
Read…. Scorched-Earth
Monetary Policy in the US, And What Happened in New Zealand
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