Ahead of the Crisis
Before October 2008, the expense and great things about keeping reserves had been clear. The fee included foregone interest, while the advantages included guarding against last-minute outflows that needed instant cash, much as a depositor might put aside cash to pay for crisis costs, or an investor might hold reserves allowing him to seize a unexpected possibility. In cases where a bank did require extra funds, it might get reserves via a loan that is overnight the federal funds market, where banking institutions with additional reserves provide to many other banking institutions. The essential difference between just what a bank could provide and just exactly exactly what it might borrow represented the benefit of keeping a book asset versus the ability price of lending it away.
The total quantity of reserves into the bank system had been set because of the Federal Reserve, mainly through open-market operations that provided and withdrew reserves through the market, so that you can support the federal funds price. There have been no interest re re payments on extra reserves, whether or not they were held as vault cash or in a Fed account. (more…)