More Free Money For Banks: St Louis Fed Discloses 'A Carry Trade In Liquidity'

[Swordsmyth]

Not only do banks earn free money on excess reserves, they can borrow money and make guaranteed free money on that.

The Federal Reserve Bank of St. Louis discusses the Carry Trade in Liquidity.

The IOER [interest on excess reserves] has been the effective ceiling of other short-term interest rates. The figure above compares the IOER with overnight rates on deposits and repos.
As we can see, the IOER has mostly remained above these two rates, implying that (at least some) banks have been able to borrow funds overnight, deposit them at the Fed and earn a spread, in essence engaging in carry trade in liquidity markets.
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[h=3]Interest Rate on Excess Reserves[/h] ​

[h=3]How Much Free Money?[/h] ​

More at: https://www.zerohedge.com/news/2018...scloses-more-free-money-carry-trade-liquidity

 

[Chester Copperpot]

They do this to keep price inflation down.

 

[Zippyjuan]

banks have been able to borrow funds overnight, deposit them at the Fed and earn a spread, in essence engaging in carry trade in liquidity markets.
Interest Rate on Excess Reserves

Gee- with all that money the banks can be making by borrowing free money from the Fed, they must have billions out on overnight loans! How much do they currently have in outstanding loans from the Fed? $290 million. Million- not billions.

https://fred.stlouisfed.org/series/BORROW

Why so little money borrowed? How big is that spread? What is the interest rate they can borrow overnight funds at? Currently the Fed discount rate is 2.5%. What is the rate paid on excess reserves? 2.2%. They would be losing money if they tried borrowing overnight and collecting the Excessive Reserves interest rates. That is why they aren't doing it.

As the St Louis Fed article linked in the OP notes:

Note, however, that with higher interest rates, the spread between the IOER and these two overnight rates has disappeared.

 

[spudea]

When he's right he's right. Yeah this isn't a real thing. Banks borrow from the overnight window to cover their reserve requirement, not to hold excess reserves. The Fed knows each banks reserve requirement and its basically automatic to create an overnight loan to cover the requirement. It's not something the bank manually chooses to do like "oh yeah i'm gonna borrow from the fed and hold excess returns and capture the spread!!!" That doesn't exist.