Fed Pays Banks $12 Billion on “Excess Reserves,” Taken from Taxpayer Pockets
Circuitous hidden wonders of paying interest on “excess reserves.”
The Federal Reserve just went through its annual ritual of disclosing its preliminary results for the year: The income it earned less its operating expenses, according to central bank accounting, and how much of these earnings it is remitting, as it does every year, to the US Treasury Department. But this statement includes another nugget.
In 2016, the Fed paid our favorite banks $12 billion in interest on their “excess reserves” held at the 12 regional Federal Reserve Banks (the New York Fed, the Boston Fed, the Dallas Fed, the San Francisco Fed, etc.). But wait… who’s actually paying that $12 billion?
Is it just a well-earned freebie for the banks, conjured up out of nothing, in Fed-style? Nope. The taxpayer paid the $12 billion to the banks. Here’s how.
The Fed earns interest income from the $2.46 trillion in Treasury securities and from the $1.74 trillion in Agency mortgage-backed securities on its balance sheet. These are the securities the Fed bought from its Primary Dealers with money that it had created under the QE program. So now, it’s collecting the coupons. This is its income.
After subtracting its operating expenses ($709 million in 2016) and the interest it pays to the banks for their “excess reserves,” it remits the remainder to the Treasury Department. This is revenue for the US government, which can use every dime it gets.
According to the Federal Reserve Board’s preliminary estimates of its 2016 results, it will pay the Treasury Department $92 billion. That’s down from $97.7 billion it paid the Treasury in 2015.
Part of the reason why the payment is lower: the Fed is paying the banks more on their “excess reserves”; and this amount it pays the banks is deducted from the amount it pays the Treasury. Here are those infamous “excess reserves” that came into being as QE kicked off at the end of 2008:
As you can see, these excess reserves have dropped by about $775 billion since their peak at the end of 2014. They ended 2016 at $1.925 trillion.