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IPFS News Link • Central Banks/Banking

Free Money! Banks Paid $22 Billion to Not Lend?

• https://mishtalk.com, by Mish

By December of 2016, excess reserves fell to $1.9 trillion but have since climbed back to $2.2 trillion.

On October 3, 2008, Section 128 of the Emergency Economic Stabilization Act of 2008 allowed the Federal Reserve banks to begin paying interest on excess reserve balances ("IOER") as well as required reserves. The Federal Reserve banks began doing so three days later.

As interest rates have risen, so has the free money to banks.

At 1% interest, banks receive $22 billion in free money every year, nearly all of that goes to the largest banks.

Banks Paid $22 Billion to Not Lend?

Some argue that banks have an incentive to not lend, simply to collect interest.

Mathematically, it does not work that way. Excess reserves are a function of the Fed's balance sheet and those reserves do not change whether a bank lends more or not.

A discussion of Interest on Excess Reserves and Cash "Parked" at the Fed on the New York Fed Liberty Street website explains.


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