The Fed pays interest to banks on all reserves, largely crammed down banks’ throats via past QE. How much free money is that? 
Understanding Reserves
The Fed used to pay banks interest on “excess reserves”. Excess reserves are total reserves minus required reserves.
As announced on March 15, 2020, the Board of Governors reduced reserve requirement ratios on net transaction accounts to 0 percent, effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
Since there are no reserve requirements on either checking or savings deposits, all reserves are effectively excess reserves, and the Fed pay banks interest on everything. That includes free money crammed down banks throats via QE.
Reverse Repos
The Fed also pay interest on reverse repos. A reverse repurchase agreement (RRP, or reverse repo) is a short-term agreement to sell securities in order to buy them back at a slightly higher price. The primary recipient of reverse repo interest are the money market funds.
It’s not important to understand these functions, just follow the math below.
Target Fed Funds Rate
The New York Fed explains: The New York Fed conducts repo and reverse repo operations each day as a means to help keep the federal funds rate in the target range set by the Federal Open Market Committee (FOMC).
In order to suppress a free market in interest rates and to help control the mess the Fed created via Quantitative Easing (QE), now Quantitative Tightening (QT), the Fed is handing out free money left and right.
To calculate free money, we need to watch three things: Interest rates, reserves, and reverse repos.
Reserve Balances at the Fed, Reverse Repos, Interest Rate
Understanding the Free Money Forces
- In isolation, rising interest rates add to the free money given to financial institutions.
- QT reduces bank reserves and thus free money.
- Reverse Repos are now slowly declining. This also reduces free money payouts.
The net impact of these forces has been pretty stable for about six months, roughly between $250 billion and $280 billion in free money given to banks at an annual rate.
The impact of QT is moving faster than rate hikes so net free money will decline over time.
Free Money at Taxpayer Expense
My numbers are approximate, using end of month interest rates and monthly average balances. In practice, this is all calculated daily. But within a few billion dollars, the Fed is giving banks about $273 billion annually at the current rate.
It’s important to note that free money that should be going to taxpayers. Instead the Fed gives it to banks because its QE/QT programs made a huge mess out of monetary policy.
Thank former Fed Chair Ben Bernanke for this. He is the one who lobbied Congress for the right to send out all of this free money. He said it was necessary for the QE program he launched, and every Fed president since maintained.
Free Money Wasn’t Enough!
Please note that banks were not happy with all this free money. Silicon Valley Bank blew up because it wanted more.
Rather than take deposits and park them at the Fed, Silicon Valley Bank (SVB) and many other banks purchased longer-dated treasuries and got clobbered when interest rates rose.
This was pure total greed and the Fed and FDIC stood back and watched it all happen.
The Fed Admits a Mistake in Collapse of SVB, Seeks More Power Anyway
On May 1, I commented The Fed Admits a Mistake in Collapse of SVB, Seeks More Power Anyway
Supervisors Ignored 31 Open Findings
SVBFG had 31 open supervisory findings when it failed in March 2023, about triple the number observed at peer firms. The supervisory findings at SVBFG included core areas, such as governance and risk management, liquidity, interest rate risk management, and technology.
The Fed admits it needs new liquidity rules now. But don’t worry. it will wait several years to implement them.
Bank Contagion Spreads Despite Fed Assurances the System is Sound
On May 4, I commented Bank Contagion Spreads, Shares Plunge Again Despite Fed Assurances the System is Sound
It wasn’t just SVB. All the banks were unhappy with free money. SVB went under because it was the most greedy.
Dear FDIC and Fed, We Need a Genuine Safekeeping Bank, Not Band-Aids
The fed is proposing a Mickey Mouse overhaul when the real solution is simple.
I explained in detail in Dear FDIC and Fed, We Need a Genuine Safekeeping Bank, Not Band-Aids
Understanding the Real Problem
The 2023 bank failures arose from what the banks did with those uninsured deposits, not the fact that the deposits were uninsured.
Banks could easily have parked the money back at the Fed collecting generous amounts of free money because the Fed pays interest on reserves.
Instead, the banks made enormous bets that interest rates would not rise rapidly. When rates rose, paper losses soared, and the banks became capital impaired.
Pertinent Question
Why are banks allowed to gamble on interest rate policy with deposits allegedly payable on demand?
Logically, money cannot be available on demand while simultaneously parked in long-term treasuries, but that is precisely what FDIC and Fed regulations allow.
I offered a comprehensive solution in the above post. The Wall Street Journal, the Hill, and other media outfits turned down my Op-Ed but interested parties are invited to read and comment.
Meanwhile, month after month, we witness totally lame press conferences following FOMC meetings.
No one ever asks Jerome Powell about all this free money, Fed-sponsored greed, Fed losses on its portfolio of assets, money supply or anything else relevant to this important discussion.
The Fed and mainstream media continues to sweep this enormous mess under the rug.
The idea that banks could have just left their reserves parked at the Fed to earn “free money” is simplistic. The interest rates being paid back in 2019 and 2020 on reserves were simply too low to sustain bank operation costs. Banks were essentially forced to chase yield by going longer due to the Fed’s ZIRP. However, it is baffling to me that the risk officers at these banks did not recognize that at some point interest rates would revert to the mean and rise, and also therefore the need to hedge against this with some type of interest rate derivatives.
“The idea that banks could have just left their reserves parked at the Fed to earn “free money” is simplistic.”
Ridiculous.
It should be mandatory and it would have prevented the disaster at SVB.
What you are missing is Banks do NOT lend from reserves. Lending (and QE) create reserves. Banks make a profit from lending. I will grant you that capital rules penalize cash, and that’s idiotic, but that did not cause the problem.
Greed caused the problem. Banks did not lend the reserves, but instead they bet the reserves on long dated treasuries. A practice that should be prohibited.
“Banks did not lend the reserves, but instead they bet the reserves on long dated treasuries.” You seem to be playing semantics here, as loan is always a bet that the borrower will replay it. It is correct that the loans often lead, and reserves follow. However, in order to make loans, as you have pointed out previously, banks require credit worthy borrowers, and that is what was lacking. Many banks are set to take a huge losses on CRE loans, because they lowered their lending standards, by assuming prices would never fall. My point was all that SVB needed to do was hedge their bet on long term bonds, and they would have survived as the decrease in value of their treasury bonds could have easily been offset by profits with some interest rate derivatives. Were they greedy, yes of course, because hedging ultimately reduces the profits, which is why they didn’t do it.
Bank reserves are what the Fed handed out, only to be used by the banks themselves
Good article Mish! Thanks for making the reverse repos, and the reserve requirements clear. Now I get it.
Instead of complaining about it, buy some bank stocks. I think JPM is a great investment. They’ll be the last to do down. If they go down, the entire system has collapsed and all paper will be worthless.
FED working exactly as intended.
Which financial institutions are eligible / coerced into this excess reserves? It seems like if other (smaller) institutions aren’t able to get the interest revenues from excess reserves, they are put at a competitive disadvantage. No snarky comments please, I’m truly curious.
Hey Mish, Please stop using the Term “Mainstream Media”. As a group they are so far to the left they can’t even see the Mainstream from where they are that. I please join me in always refer to them as the “Majority Media”. It’s better than they deserve but it is a step closer to the truth and maybe it will catch on. Dave
Thanks Mish for speaking the unspeakable. It is such a disgrace how MSM boot lickers never possess the gonads to launch actual investigative questions during the news conferences. It certainly appears that clear paramotors have been pre-established prior to the live telecast. The truth is always too much for us serfs to comprehend.
Monetary Gifting is the answer…just not to the institutions whose monopolistic paradigm of Debt Only enforces the economic instability we are all being afflicted by.
Not trying to over compliment you here Mish, but back in 2008, time and again you jumped on and hammered Bernanke and the Fed when they started QE-1 and the bailout of the banks as they greedily had increased the leverage of all the new credit market derivatives such as credit default swaps, CLO’s and bailouts all over the place. Oh yes it was Marc Faber who supported you and all your criticism as to what was going on back then. In fact he Dr. Doom was way more gloomy than you were at the time, as he published the Gloom, Boom and Doom investment letter.
Blacklisted has it right. Biden, Trump, Gates and Powell are aliens. They are taking over! Their vaccine put their mind control chips in our brains to make us all democrat voting zombies.
Thanks for the info Blacklisted.
PS. Did you see the youtube videos from the alien happenings on the dark side of the moon?
Aliens ate my baby dingo.
i believe you missed the mark bigtime. as somebody already stated, all banks without sound money as an anchor always fail. nixon defaulted just a short 50 years ago. we had around 30,000 banks in 1920. now down to fraction of that. guess what. the NYC banks who own the FEDRESNY gobbled them up on the cheap past century. the original intention. nixon’s dumb move has destroyed the currency. take a look at thishttps://www.stlouisfed.org/en/on-the-economy/2021/december/steady-decline-number-us-banks
do the middlebrows ever contemplate that tricky dick was a nyc lawyer. he conned the middlebrows. delivered the real free shit army directly to nyc banks.
link to institutionalinvestor.com
Tricky Dick was a lifelong politician (and a hell of a poker player, that’s how he financed much of his first campaign for the House). NYC lawyer was a rest stop between political campaigns, that’s it
true. but he was the dumbest president ever. cunning yes. but so UNWISE he ruined the money. really dumb twisted man. btw he really was a cuck. drove his wife to her date before they married. twisted little twit. know a family who helped finance him in SC……..
I hate to have to point out the obvious, but the Fed doesn’t care, just as all the mother WEFers, Covid pushers, climate change zealots, and war mongers that are pushing for the Great Reset. The current monetary Ponzi system is coming to an end, and they know it. There will be sovereign defaults and the attempt to go all digital to track, tax, and force social compliance with their psychotic Utopia.
People can debate and discuss all they want, which they do to avoid having to actually do something. Hell, we just had three legitimate whistleblowers testify under oath on the fact we have aliens and their ships and know one cares.
Unless we are willing to revolt against this wilderness of lies and corruption, you might as well stop wasting your time correcting officialdom, and start preparing how to survive the next 10 years.
Welcome to the new, improved, high tech version of medieval feudalism.
The FED didn’t have the option of increasing reserve requirements to combat inflation without raising rates. Government fiscal policy was an exceptionally strong inflationary force. Now the FED has to stabilize mark to market capital deterioration by paying interest on excess reserves.
No outfit is going to publish an article against the ABA’s wishes.
Makes me wonder how many broke banks are under that rug.
In 2011 Bernie Sanders got his hands on CFTC records from 2008 that clearly showed oil futures had been manipulated, Hunt Brothers style, by a handful of the biggest banks – Goldman Sachs, Morgan Stanley, and I think I recall Citi as well.
These banks had also flooded the market with sub-prime liar loans, they knew pressing RBOB prices would crimp disposable income and initiate the onslaught of defaults.
They were also short those sub-primes, it’s no coincidence Goldman was paying record breaking prop desk bonuses in 2009-2010 while Americans were being evicted.
The CFMA, Commodity Futures Modernization Act of 1999, deregulated bank transparency, they don’t have to disclose any positions in futures or derivatives.
So, when I see gargantuan amounts of free money being lobbed at these banks, I question everything I see, i.e. – Why did lumber futures soar so high a year ago?
Having that amount of money, plus leverage, makes them omnipotent over the economy, having the ability to manipulate commodity prices gives you the ability to accurately foresee earnings for buyers/producers of the given commodity.
And…. where the Fed mandate is to moderate inflation, commodity prices can be “adjusted” by Fed member banks to ensure the relative wealth of bank C-suites remains extreme relative to the median.
Pretty much anything can be (and probably is) manipulated with “paper” and derivatives. When the consequences are indifferent shrugs or a small portion of the gains, it practically demands that the behavior expand in scope.
The point being that institutional investors or Traders are required to disclose their positions in the regular markets.
The CFMA exempts the same disclosure on Futures and derivatives.
I happen to think we have the right to know what these banks are doing with all that free money.
.
You’ll get no argument from myself on that point. Unfortunately they do not have to file SARs on themselves.
Excellent article and explanations.
Don’t give up Mish on your reforms. You still may find a willing ear or two. Maybe some members in Congress.
For the past thousand years every bank failed unless it held 20% of deposits on hand in sound currency or gold. The Fed needed a hundred years to dig this hole. The fed has one year to fill the hole before it collapses.
Since SVB bank collapse the banks borrow from the Fed.
Not certain what you mean by “QT is now scheduled to decline at a faster rate”. Does that mean the Fed balance sheet will decrease faster (QT increasing to me) or does it mean the Fed balance sheet will decrease slower (QT decreasing to me)?
The WSJ and other publications wouldn’t take your article on a safekeeping bank because it would disrupt the banking system. These business publications want to keep in the good graces of the banking system.
Net Free Money: The impact of QT is moving faster than rate hikes so fee money will decline over time.
Unfortunately Mish, no one cares about solving problems anymore. Your Op-eds were stonewalled because the system is captured.
“Unfortunately Mish, no one cares about solving problems anymore.”
This!
AND: To a person, literally: Not one single person in any position to solve larger problems, has the brains and competence to do so, even if he wanted to. Which, of course, none of them will ever do. Since: Neither does, again literally, not one single one of them has neither the brains nor the competence to even recognise there is a problem in the first place.
We are a nation where all wealth, hence power, has been transferred to idiots so dumb they believe the mold in their homes’ walls have created trillions upon trillions in aggregate wealth over the past few decades, now. As well as that putting dead guys faces on paper pieces also create wealth. People that all-overshadowingly stupid, have NO, as in hard zero, abilities to comprehend anything at all. That’s where we are now at.
Only upside being: By now, even procreation has largely slipped beyond the idiot classes’ reach. So, at least the problem looks self correcting in the long run. Always look on the bright side of life, and all……
Some states force their stupids to give birth… and stupids aren’t great at contraception. I don’t think there’ll ever be any decrease in aggregate human stupidity.