Banks Foreign Banks Collecting Billions From the Fed
By Mike Cherney
2:10 pm ET May 8, 2014
Foreign banks are collecting billions of dollars in interest from the Federal Reserve, analysts said, a sum that stands to rise when the central bank ultimately begins raising interest rates.
In 2014, the Fed will pay an estimated $6.74 billion in interest on reserves to banks overall, with an estimated $3.37 billion headed to foreign banks specifically, according to an analysis from J.P. Morgan, which used Fed data.
Analysts say paying interest on reserve accounts helps the Fed exercise more control over short-term rates, and the Fed says it eliminates “the implicit tax that reserve requirements used to impose” on banks.
Banks are required to keep a certain amount of cash in reserve at the Fed, but are also allowed to keep more than required at the central bank. As of April, total reserves at the Fed amounted to about $2.66 trillion—only about $80 billion was actually required—up from about $1.83 trillion in April of last year, according to Fed data. In 2008, the Fed began paying interest, currently at an annual rate of 0.25%, on these reserves.
Banks can borrow money on a short-term basis from entities like money market mutual funds, perhaps at rates around 0.15%, and then park the money at the Fed and earn 0.25%, in what is considered a risk-free transaction. The trade is attractive to U.S. branches of foreign banks that do not pay fees to the Federal Deposit Insurance Corp.
Banks making that trade “are actually doing what the Fed is incentivizing them to do,” said Alex Roever, head of U.S. rates strategy at J.P. Morgan. “The Fed’s willing to pay that cost, and when you look at everything the Fed earns on its balance sheet, what they pay out on reserves is relatively low.”
The interest was designed as a way to help policymakers control short-term rates. In September of last year, the Fed also introduced a “reverse repo” program that effectively allows money market funds and other entities to invest cash directly with the Fed. In a repurchase agreement, or repo, one party sells securities to the other and agrees to buy them back later at a higher price.
In testimony to Congress on Wednesday, Fed Chairwoman Janet Yellen said that when the time comes to raise short-term rates, the Fed will increase the interest rate it pays to banks on reserves. She also said the Fed could increase the rate it pays through the reverse repo program.
Interest on the reserves is “one of the tools they’ll use in normalizing monetary policy in the years to come,” said Lou Crandall, chief economist at research firm Wrightson ICAP. “In order for that to be effective, you need to at least have some banks willing to take money from non-bank institutions and leave it on deposit at the Fed, and that’s how it transmits itself to the broader system.”
The Fed has sought to keep overall interest rates low, to encourage borrowing and spending and to help stimulate economic growth. It has kept the target for the fed funds rate—the rate at which banks lend to one another overnight—near zero since December 2008 and has embarked on a bond-buying program to keep yields on longer-term debt low.
Among those receiving the interest: Credit Suisse Group, the Swiss bank that U.S. authorities are targeting for allegedly helping clients evade U.S. taxes. In Credit Suisse’s case, the amount of potential interest from the Fed appears small compared to the bank’s interest income from other sources.
Investors have largely shrugged off the news, reported Monday by The Wall Street Journal, that federal prosecutors were close to securing a guilty plea from Credit Suisse on the tax matter. The bank’s stock recently traded at $31.14 a share on Thursday. That’s down only slightly from its five-day high of $32.02, which it hit on Friday.
On average, Credit Suisse’s New York branch held an end-of-quarter balance with the Fed of about $24.8 billion in 2013, according to regulatory filings. Using that figure, Credit Suisse would have earned about $62 million, at an annual rate of 0.25%, in interest payments from the Fed last year. If it borrowed $24.8 billion in the short-term markets at a 0.15% rate, the current one-month London interbank offered rate, it would have cost the bank $37.2 million for the year, a difference of about $25 million.
That would still just be a drop in the bucket for Credit Suisse. Last year, it reported overall net interest income of 8.1 billion Swiss francs, or $9.25 billion. Exactly how much each bank receives in interest from the Fed is not publicly disclosed, analysts said.
http://blogs.wsj.com/moneybeat/2014/05/08/for...m-the-fed/
By Mike Cherney
2:10 pm ET May 8, 2014
Foreign banks are collecting billions of dollars in interest from the Federal Reserve, analysts said, a sum that stands to rise when the central bank ultimately begins raising interest rates.
In 2014, the Fed will pay an estimated $6.74 billion in interest on reserves to banks overall, with an estimated $3.37 billion headed to foreign banks specifically, according to an analysis from J.P. Morgan, which used Fed data.
Analysts say paying interest on reserve accounts helps the Fed exercise more control over short-term rates, and the Fed says it eliminates “the implicit tax that reserve requirements used to impose” on banks.
Banks are required to keep a certain amount of cash in reserve at the Fed, but are also allowed to keep more than required at the central bank. As of April, total reserves at the Fed amounted to about $2.66 trillion—only about $80 billion was actually required—up from about $1.83 trillion in April of last year, according to Fed data. In 2008, the Fed began paying interest, currently at an annual rate of 0.25%, on these reserves.
Banks can borrow money on a short-term basis from entities like money market mutual funds, perhaps at rates around 0.15%, and then park the money at the Fed and earn 0.25%, in what is considered a risk-free transaction. The trade is attractive to U.S. branches of foreign banks that do not pay fees to the Federal Deposit Insurance Corp.
Banks making that trade “are actually doing what the Fed is incentivizing them to do,” said Alex Roever, head of U.S. rates strategy at J.P. Morgan. “The Fed’s willing to pay that cost, and when you look at everything the Fed earns on its balance sheet, what they pay out on reserves is relatively low.”
The interest was designed as a way to help policymakers control short-term rates. In September of last year, the Fed also introduced a “reverse repo” program that effectively allows money market funds and other entities to invest cash directly with the Fed. In a repurchase agreement, or repo, one party sells securities to the other and agrees to buy them back later at a higher price.
In testimony to Congress on Wednesday, Fed Chairwoman Janet Yellen said that when the time comes to raise short-term rates, the Fed will increase the interest rate it pays to banks on reserves. She also said the Fed could increase the rate it pays through the reverse repo program.
Interest on the reserves is “one of the tools they’ll use in normalizing monetary policy in the years to come,” said Lou Crandall, chief economist at research firm Wrightson ICAP. “In order for that to be effective, you need to at least have some banks willing to take money from non-bank institutions and leave it on deposit at the Fed, and that’s how it transmits itself to the broader system.”
The Fed has sought to keep overall interest rates low, to encourage borrowing and spending and to help stimulate economic growth. It has kept the target for the fed funds rate—the rate at which banks lend to one another overnight—near zero since December 2008 and has embarked on a bond-buying program to keep yields on longer-term debt low.
Among those receiving the interest: Credit Suisse Group, the Swiss bank that U.S. authorities are targeting for allegedly helping clients evade U.S. taxes. In Credit Suisse’s case, the amount of potential interest from the Fed appears small compared to the bank’s interest income from other sources.
Investors have largely shrugged off the news, reported Monday by The Wall Street Journal, that federal prosecutors were close to securing a guilty plea from Credit Suisse on the tax matter. The bank’s stock recently traded at $31.14 a share on Thursday. That’s down only slightly from its five-day high of $32.02, which it hit on Friday.
On average, Credit Suisse’s New York branch held an end-of-quarter balance with the Fed of about $24.8 billion in 2013, according to regulatory filings. Using that figure, Credit Suisse would have earned about $62 million, at an annual rate of 0.25%, in interest payments from the Fed last year. If it borrowed $24.8 billion in the short-term markets at a 0.15% rate, the current one-month London interbank offered rate, it would have cost the bank $37.2 million for the year, a difference of about $25 million.
That would still just be a drop in the bucket for Credit Suisse. Last year, it reported overall net interest income of 8.1 billion Swiss francs, or $9.25 billion. Exactly how much each bank receives in interest from the Fed is not publicly disclosed, analysts said.
http://blogs.wsj.com/moneybeat/2014/05/08/for...m-the-fed/
