When $1.2 Trillion In Foreign ‘Hot Money’ Parked At The Fed Dissipates

Wolf Richter's picture

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

It fits the pattern of gratuitous bank enrichment perfectly, but this time, the big beneficiaries of the Fed are foreign banks. A JPMorgan analysis, cited by the Wall Street Journal, figured that in 2014 the Fed would pay $6.74 billion in interest to the banks that park their excess cash at the Fed – half of that amount, so a cool $3.37 billion, would line the pockets of foreign banks with branches in the US.

This is where part of the liquidity ends up that the Fed has been handing to Wall Street through its bond purchases. Currently, the Fed requires that banks keep a minimum balance of $80.2 billion at the Fed. Banks can keep up to $88.2 billion at the Fed as part of the “penalty-free band.” In theory, as “penalty-free” implies, there’d be a penalty on balances above $88.2 billion.

But the total balance was $2.66 trillion in April, up from $2.62 trillion in March and from $1.83 trillion a year ago. The balances in excess of the “penalty-free band” have reached $2.57 trillion. The highest ever. The penalty on that?

Forget that. The Fed’s raison d’être is to enrich the banks regardless of what the costs to the economy, the rest of society, and savers. So instead of penalizing banks for these excess reserves, it pays the banks 0.25% interest not only on the required balances but also on all other balances. Spread over the year 2014, as JPMorgan estimated, interest payments on these balances would amount to $6.74 billion.

It’s a marvelous system. The banks’ cost of funds, given the heroic efforts the Fed has undertaken to repress interest rates, is near zero. Banks can borrow short-term from their depositors – that’s you and me – and from money-market funds – that’s you and me again – at near zero cost, so maybe 0.10%. Instead of lending it out, banks put that money on deposit at the Fed to earn 0.25%. It’s the laziest no-brainer in banking history. A pure gift from the Fed.

But there’s a kink. Non-US-charted banks with branches in the US benefit even more. The Bank for International Settlements, the umbrella organization for the world’s largest central banks, revealed how these non-US banks were taking advantage of the new FDIC insurance charges on wholesale funding (borrowing from other banks, short-term repos, or funding from affiliates outside the US). They’d figured out that these extra costs didn’t apply to them. They only applied to US-chartered banks.

The wider FDIC charge added 2.5 to 45 basis points to the costs of large and complex US chartered banks’ short-term wholesale funding. The calculation is complex and its result by bank is not disclosed, but the rate for the largest US bank was said to be 8 basis points.... With wholesale rates of 10 basis points or less, the new FDIC charge made bidding for such funds and parking them at the Fed at 25 basis points unattractive for many US-chartered banks but not to the US branches of foreign banks, which pay no FDIC fee.

These “seemingly small regulatory differences” at the FDIC, the report points out, turned the Fed into a special profit center for non-US banks. In this chart from the report, foreign banks’ balances parked at the Fed (blue area in dollars, and red line in percent) started shooting up at the end of 2008, and by mid-2013, reached about 50%. It resulted in “massive changes” in the balance sheets of internationally active banks.

As foreign banks took advantage of the laziest no-brainer in history, the Fed’s money-printing and bond buying regime led to an enormous inflow of money into the US – about $1.3 trillion so far. It’s the risk-free banking version of the hot money. And the $2.6 trillion in excess reserves that economists are expecting to flow into the US economy sooner or later to really stir things up? Half of it is that hot money. It won’t ever flow into the US economy. It won’t fuel the “escape velocity” that has been forecast for five years in a row. It’ll dissipate.

The Fed has an excuse for this banking gravy train: “eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions,” it says. OK, I get it, concerning the “penalty-free” $80.2 billion that banks are required to deposit at the Fed. Fine. Pay them 0.25% on that. I don’t get paid that much on my money at the bank. But what the heck. Let’s not quibble over pocket change, which is what billions have become to these megabanks. But what about the annual interest on $2.6 trillion in excess reserves?

Ah, the Fed has an excuse for that too: it’s of course – I mean, how could I possibly not think of this on my own? – “an additional tool for the conduct of monetary policy.” A policy whose goal it is to fan reckless speculation, inflate asset bubbles, enrich the banks and those who run them at the expense of savers, and douse the entire neighborhood, namely Wall Street, with free money.

We don’t know what hedge fund manager Steven Cohen will do with the money he borrowed from Goldman Sachs. We don’t even know how much it is, though it's a lot; the personal loan is backed by his $1 billion art collection. But we know how he'll use it: cheap leverage. Read.... Explosive Hidden Leverage Threatens To Blow Up the Markets

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SAT 800's picture

good article. A meaningful line item in the FX contango that I wasn't aware of.

honestann's picture


Federal Reserve Actions Ultimately Destroy

But I'm sure other folks can find better acronyms.

Stuck on Zero's picture

Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, I will rout you out! - Andrew jackson


Comte d'herblay's picture

Without getting into too much rhetoric, anyone paying attention to politics, particklerly Political Economies (haven't they ever been nothing else but) to not know that the "Financial System"  is a Totally Global, if not Universal,  one, is derelict in their duty.


OF course the ECBs are not only intertwined. They are more than that. They look like this:



Kayman's picture

Rents on money- interest, dividends, personal bonuses, etc- must eventually be earned somewhere else in the real economy.  You can inflate shares, bonds, hypothecations, swap them back-and-forth in the grand game of patty-cake but eventually someone must create wealth; and shuffling paper isn't creating wealth.

I am amazed at the financialization going on around me.  Soon the lemonade stands will be set up for an LBO.


elwind45's picture

Most of the American investment houses are going to London because of DODD -FRANK rules? But they will take the FED with them and their accounts will stay intact due to better gambling terms offshore? The money is trapped in margin accountlts at the Fed! They can trade it but cant take it out and spend it unless as BONUS? The Fed has in every instant increased its control over its slaves! And this article fails to explanation the increasing control the GLOBAL BANKING MECHANISM rules your life's by using its balance sheet to maintain control? Nothing is free not even printed ones!

elwind45's picture

Someday someday TOO THE MOON oh unless it changes? Its the same God damn system only the numbers change? Just because you really don't get it you spread fear porn! These banks are part of the system no matter what language they speak at the branch? So someone somewhere is going to get mad and take the system down? The money makes the rules no matter how its obtained? And you are actually sawing on the log of creadability? If its so easy and everyone is mad as hell at the Fed why let it go on 5 plus years because it sounded good on paper? The money cant be wrecklessly withdrawn and sold out of the dollar either? I watch European football and the locals are having a GAY OLE TIME SPENDING AMERICANS INCOME FOR THEM? and this turd is a major problem and not the answer!

Disenchanted's picture

"this time, the big beneficiaries of the Fed are foreign banks."

Really? How about every time...

iwillikers's picture

they just fund all the mortgage paper on the books with cheap money

Otto Zitte's picture

Osama bin Laden did all that?

nathan1234's picture


It was Obama bin Biden

falak pema's picture

When in spite of all this free money and mega interest arb to their advantage, thrown at them since 5 years by the FED/BOE, you have a bank like Barclays that lays off 14000 and creates a Bad Bank to park 120 billion bad debt, you have to ask yourself : where would the Barclays be without Libor scams, Forex scams,  Eurex scams, Tax evasion scams and Zirp carry trades, and all these hand outs ? 

JPM, Barclays, UBS, Deutsche...the list is endless. And, its not over. 

Farqued Up's picture

Barclays you say? You mean the one that deals in gold, charges storage fees and when I go to take delivery, sorry, we were just shitting you, you can't take delivery. Well, return the fees. Hey, someone has to pay fees.

The money wasn't enough to fight it in Grand Cayman. Fugg it, live and learn. Be sure to get bar serial numbers. God, am I a dumb ass.

ebworthen's picture

Margin debt, leverage, securitization, deriviatives - funded by the Public Treasury.

What a witches brew!

"Fillet of a fenny snake,
In the cauldron boil and bake;
Eye of newt and toe of frog,
Wool of bat and tongue of dog,
Adder's fork and blind-worm's sting,
Lizard's leg and howlet's wing,
For a charm of powerful trouble,
Like a hell-broth boil and bubble"

TheReplacement's picture

Had to add this:  All this shows is that bankers around the world are just doing a global daisy chain with reach arounds for everyone.  They just cycle the debt like ring around the rosy until we all fall down.

Tapeworm's picture

 Why is it that there are so many homosexual sexual practice  references in economic commentary nowadays? Can you spare me the graphic faggotry descriptions?

NotApplicable's picture

Why? Because this economy is gay, that's why!

Then there's the whole issue about the clubs and bath houses the elite hang out in.

TheReplacement's picture

This isn't new news.  Why does anyone say the Mario needs to print when this is going on?

Tapeworm's picture

Of course it is not news to yourself. What I lament is that John Q. Public never gets this big story laid out for him as well as Wolf does it here.

Tapeworm's picture

It's too bad that the MSM that is owned by the same filth that profits from this scheme refuses to mention how the hedge fund guys can afford to shell out 550,000,000.00 for the worst team in the  Nazional Basketball League. I nearly pewk when I read of these parasites being referred to as "Businessmen".

Good job Wolf.

zaphod's picture

If the banks took this $2.6T and lent it out, with greater than a 10x fractional multiplier, M2 an M3 would sky rocket by more than $30T. This is why the FED is paying them $6B/yr, it's to keep a lid on the massive inflationary effects of the FED's crazy printing to save us all.

Without this tithing to the banks, the effects of the FED's Ctrl+P program will be plainly seen by all.

There are only 2 possible solutions to the current box.

1) The FED could reduce fractional requirements to 20% or more, while printing M0 up. This would restore the bank's balance sheets while containing inflation and creating a more stable situation.

2) The FED could pay annual tribute to the bankers to keep them from inflating the money supply. In this manner the bankers get rich while no one else does.

Door #1 results in lower banker bonuses vs everyone else, door #2 results in massive banker wealth. The FED with Obama's blessing has choosen door #2.

rainingFrogs's picture

I believe the banks are using these excess reserves as collateral, and then using the cash to buy leveraged financial instuments.  So the multiple you are talking about is there, but in some sort of derivative.  Just another brick (of plastic explosive) in the (global derivatives) wall.

DerdyBulls's picture

Does this inflate the price of goods consumed by oligarchs?

DerdyBulls's picture

Wow someone who gets it. Many around here seem to think only 10% has been parked at the FED. Most of it's parked at the FED. Where's the velocity? Where's the inflation in the general economy. It's just now starting to be loaned out. We in the commercial real estate business haven't been able to get jack. Underwriting is just beginning to soften. 

Cthonic's picture

Excess reserves represents deposits by banks' clients.  There is a common place where one can borrow against such balances: a margin account at a brokerage.



Crawdaddy's picture

If you make a living in the FIRE economy then you better be planning for lean times, The FIRE companies have prospered due to the crony free money but their day is coming. Seeing as almost everyone with a job these days is either directly working for a FIRE company, this seems crazy. The party may last longer (what do I know) but eventually the man they met at the crossroads will come seeking his payment.

DerdyBulls's picture

And I thought "lean" was the new normal. The party's a mirage. I'm thinking paid off apartment complexes for the masses to crowd into and arable farmland for the next depression. I just hope it doesn't get confiscated for the common good.

economics9698's picture

Tyler are the ER's rehypothicated?