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The Federal Reserve Will Hand Out $11 Billion In Riskless "Profits" To Foreign Banks In 2016
As a result of the Fed's balance sheet expanding to $4.5 trillion over the past 7 years, the most direct consequence has been the increase in excess reserves held at various banks to just over $2.5 trillion. This, as we have shown before using the Fed's H.8 data, means that cash held by various commercial banks has risen proportionately, and as shown in the chart below, there has been a direct correlation between the amount of excess reserves in the system (shown by the black line) and bank cash holdings.
One thing that stands out in the chart above is that while $1.4 trillion of this cash can be found at domestic US banks, both large ($1.06 trillion) and small ($370 billion), a whopping $1.15 trillion remains parked at foreign banks operating in the US. This differential can be seen in the chart below.
While the reasons for disproportional allocation of cash within foreign banks has been discussed over the years ("Where The Fed's Excess Reserves Are Going: 51% Foreign Banks; 49% Domestic"), and is largely driven by the FDIC's decision several years ago to levy a 15bps deposit insurance assessment from large US bank holding companies, the outcome is clear: nearly half of all Fed excess reserves are parked with foreign banks.
Why is this an issue?
We first explained the nuances of the "big picture" of what years ago we dubbed the world's biggest carry trade (the Fed collected interest income on its Treasury and MBS holdings, and pays out interest payments on the amount of Excess Reserves parked with it at the IOER rate) nearly three years ago, in February 2013, just after the Fed launched its latest reserve boosting program, QE3, when we wrote "How The Fed Is Handing Over Billions In "Profits" To Foreign Banks Each Year."
This is what we said back then:
We show the surge in the foreign bank cash level, as well as the cumulative cash interest paid to [foreign] banks assuming a weekly cash interest payment. What the chart shows is that from December 2008 through the last week of January, the Fed has paid out some $6 billion in cash (red line) to European banks simply as interest on excess reserves.
We added that "all of this, of course, ignores what happens should the Fed hike interest rates across the board, which will also mean rising the rates on IOER, once inflation finally strikes."
Nearly three years later, inflation as measured by the Fed's preferred CPI metric never struck, and in fact inflation expectations have kept falling as measured by the 5Y5Y, but as everyone knows, the Fed did hike rates last week (unleashing a "policy error"), in the process doubling the interest the Fed will pay on Excess Reserves from 0.25bps to 0.50bps.
Who benefits from this? Almost exclusively, the banks who continue to park their excess reserves at the Fed (whether or not they use the collateral as risk assets to corner markets like JPM did with its London Whale is irrelevant) and collect 0.5% on said cash. Nobody more so, however, than foreign banks.
First, this is what the chart above looks like if extended from our last update in February 2013 through today.
The chart above shows that between early 2013 and today, foreign banks received another $9 billion in cumulative interest payments from the Fed, a grand total which now amounts to just shy of $15 billion.
And now, with the IOER doubling to 0.50%, it means that foreign banks will collect interest from the Fed at double the pace. Indeed, assuming all else is equal such as total excess reserves parked with foreign banks remaining flat at the current $1.15 trillion level, it means that just over the next 12 months, foreign banks will pocket another $6 billion, increasing the cumulative Fed cash payment from $15 billion currently to $21 billion.
But wait there's much more - the calculation and the chart above assumes the Fed does not hike rates in 2016; according to the latest Fed dots we know that this is untrue and that at least according to the world's most important central planners, there will be at least another 4 rate hikes in the coming year, most likely in March, June, September and December, bringing the year end IOER to 1.50% from 0.5% currently.
This means that instead of handing over "only" $6 billion in risk-free interest to foreign banks, these same foreign banks operating on US territory with reserves parked at the Fed will receive a grand total of $11 billion in IOER interest in 2016, closing the year with $26 billion in cumulative interest receipts from the Fed.
This would look as follows:
So there you have it: a riskless "profit" handout for foreign banks, subsidized by the most famous US "public" institution - the Federal Reserves - amounting to approximately $11 billion in just one year.
And since there is no plan in sight for unwinding the Fed's gargantuan balance sheet and soaking up the trillions in excess reserves parked at both domestic and foreign banks, this handout of risk-free cash will continue indefinitely.
Nearly three years ago we closed by saying: "We can only hope someone in Congress asks Ben Bernanke ... under which Fed charter it is that the Fed is more focused on generating profits (not just trillions in excess liquidity) for European banks?"
Ironically, this is taking place just as Europe's own negative rates would, at least in theory, lead to substantial losses for European banks. Luckily, said banks also have their US exposure to boost their IOER annuity courtesy of the US "public institution" known as the Fed.
Now it is no longer Bernanke but Yellen who is in charge, and while the we doubt Congress will ask anyone anything, now that foreign central banks are set to generate over $10 billion in "profits" on the back of the US central bank which, at least in theory, is meant to serve the US public over the next 12 months, we wonder if others will ask just what was the rush to hike rates and give foreign commercial banks an unprecedented "profit" stream just as the US economy is rolling over into a manufacturing (initially) recession?
Source: H.8
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11 billion is rounding error for the Fed clowns
The rate hike is part of covering up the fact that Treasuries are being sold to CBs. That means high rates of inflation because rolling-over the national debt onto entirely-created fiat electronics is equivalent to QE. Past inflations have not been good for people, business, governments, miliary, and so our Status Quo just started a steep slide to the cliff. $1T / year ==> 10% inflation according to Shadowstats. What will $5T / year do?
Nobody seems to notice. This is a financial-world equivalent to 9/11, and nobody notices.
The Fed, making in rain since 1913.
If they were a private company but did NOT control what I am paid in, I wouldn't give a fuck.
pods
This is part of Barry's new law, "Help a Banker Succeed Act" he passed last week. The same day he probably signed a bill supporting cutting SS benefits to Senior American Citizens.
Gotta prop up the invader governments so they can keep up the genocide.
https://www.youtube.com/watch?v=44vzMNG2fZc
The Western banksters can produce a trillion with a few keystrokes. A few billion means little to them.
the little maggot is a billionaire
I don't think these banksters have any concept of how big a trillion really is. How one slip or error can cause an avalanche when you are dealing with trillions. Politicians, definitely don't. Trump, if he becomes president might. A mutant cross between bankster and politician. That might be interesting to watch.
The zombies are hungry
Tsk, everybody keeps assuming that the USD is actually worth something. All this does is guarantee the collapse will be awesome and take everybody down all at once.....
this is just one example of why the banks don't give a flying fuck about the real economy. they don't need a real economy to get their bonus.
While this is reprehensible and all I doubt given the size of the possible payoff here that this is a primary driver of anything.
They are up to something they always are however it takes time to trace this out since we only see a tiny portion of what they do. The great majority in my opinion is hidden but hey what do i know?
John Hussman's weekly commentary out yesterday stated that increasing IOR or IOER from 0.25% to 0.5% was unnecessary and basically a handout, as was the previous policy of paying 0.25% on IOR. He does a good job of explaining things.
http://hussman.net/wmc/wmc151221.htm
"This begs the question: Since the marginal lenders were getting zero, wouldn’t we have obtained the identical result even if we hadn’t paid the banks 0.25% on trillions of dollars of reserves? Wouldn’t over $6 billion annually have been returned to the Treasury for the benefit of U.S. citizens, rather than paying banks 0.25% on reserves for no reason? The answer is yes, but hey, who doesn’t want to subsidize banks? Total profits of the U.S. banking system have soared to a record $160 billion annually, so $6 billion is a drop in the bucket. Just look away."
"Once again, this begs the question: Since the marginal lenders will now be getting 0.25% through the RRP facility, wouldn’t we obtain a 0.25% federal funds rate even if the Fed only paid the banks 0.25% on their excess reserves as well? Wouldn’t over $6 billion annually be returned to the Treasury for the benefit of U.S. citizens, rather than paying banks that additional 0.25% on reserves for no purpose? Once again, the answer is yes, ..."
11 billion is about about 2 days worth of printing.
...or 1.1% of Ben's $1T platinum coin.
and about a tenth of a milisecond of computing +/- network speed.
One more time: The Fed keystrokes money into existence and the taxpayers get stuck paying real earned income to them for the interest due on the bonds they buy? Pure air to money laundering.
Yes, the taxpayers finance the Federal Reserve and member banks. Not counting the 6% divy paid to members by the Act nor instant income for Reverse Repos.)
The question you asked at the beginning of your post has an answer of no, as the Fed sends most of the interest it receives from the Treasury back to the Treasury. Taxpayers get stuck paying the dividends, and IOR, and reverse repo interest, as you stated.
you two, please get back to work. This shit is expensive.
socalbeach: "Fed sends most ... back to the Treasury.
Fed skims a healthy 6% of the "profits" according to its cost-plus contract and the rest goes to the treasury.
FIFY
We're both saying the same thing ("Taxpayers get stuck paying the dividends").
Most? They keep their $1.6B 5 star operating expenses without audit, that is taxpayer money.
Give me $300b and let me keep $1.6b and I'll give you the rest back smiling.
An article about FED banker swindles and whether congress will look into it and only what, ten comments so far.
FWIW...a lot moar commenting on articles involving guns, war. Everybody knows about and expects the constant swindles and everybody knows and expects congress to do nothing. Coincidence?
Thanks for the details on this one just the same Tyler.
Just throw the word "Trump" in the title and you'll see 800+ comments within minutes. Problem is none of them would actully read this, let alone understand it.
The politician followers/hopers are brainwashed mental cases.
The bankers just happened to start paying interest on reserves in 2008 thanks to the Economic Stablization Act of 2006 (http://www.federalreserve.gov/monetarypolicy/20081006a.htm) and the Fed just happened to stop publishing M3 in 2006 (http://www.federalreserve.gov/releases/h6/discm3.htm). Interesting that the Fed suddently felt the urge to do to these unprecedented things just before the blow up.
These moves were obviously done because the internationalist bankers were just about to kick off their new scam as seen in this article. They don't want you to know how much money is in circulation and of course they want to pay themselves interest with your money on the money they took from you in the first place. Sounds fair...
What else happened in 2006 to create the infrastructure to run this new ponzi scheme we're seeing ? I'd imagine there was alot more done to help faciltate this and cover their tracks.
We Basel'd some folks.
I just remembered that 2007 was when the Fed got all willy nilly with their discount loans and started accepting anything as collateral. Of course they didn't want to talk about that information so it became a matter of "national security". That was the whole Bloomberg suit that went to the supreme court. Did the bankers pull this brazen totally illegal cash handout in 2007 to capitalize foreign banks with funny money so they could start paying out 25bps to themselves ? Looks like it. The Bloomberg case shows when they kicked it into gear with this new excess reserve scam.
these foreign banks may also enjoy escaping Nirp policies in the EU with 1/2% interest attached to at least some of that 105B in Reverse Repo that the Fed placed as reserves. it brings up an interesting problem, hwo would the Fed be ab le to raise US rates by placing 1/2 the RRPO on US only institutions.
if the Euro banks are basically charging their customers for deposits AND drawing 1/2 a point on Fed reserves, how good does it get? it brings up an interesting policy point, if half of the all the RRPO is being sucked down the negative interest vortex in the EU how do they expect RRPO to manually lift rates? i can see the Fed hike propping up the dollar (for a measly 105B) and bringing in trillions in safe haven investments, but only if the money stays in US banks. the rate hike RRPO is clearly a leveraged policy tool, if this is correct they will probably have to increase the amount of RRPO which is QE as long as the Fed does not drain its balance sheet and it is not doing that now or in the foreseeable future.
Year-End bonus money for the banksters.
So what the world is waiting to see, is if raising the interest rate actually spurs demand for going into debt. I'm going to go with no since everyone is still broke as fuck, and now the Fed is raising food/utility costs further. So lets see, Japan taught us that endless QE doesn't work. Europe taught us that NIRP doesn't spur demand for loans. What will the US teach, how to blow the fuck up in an epic fashion?
Also, with Eurpoe still in NIRP mode, expect these excess reserves to stay parked right where they are and not head back to their home.
We all know this but need to remember, the central banks are a SINGLE global system. I keep hearing 'this country's bank is doing A' and 'this country's is doing B'. This is a concerted effort that has taken decades to build.
They are bailing out the status quo as a global whole. It cannot exist in one country and not others. It's an all or none game. The Fed was SUED which allowed us to know how many trillions went to foreign banks. The Japanese, Swiss, and every other national bank is buying US stocks and treasuries, as we buy theirs. Manipulation of rates and asset prices is global and they use the facade of seperation to squeeze and manipulate flows where they need on a whim. The BIS to me looks like a chimney that should have the acrid smoke of humanity bellowing from the top.
This round robin circle-jerk is only buying time - but for WHAT I don't think they have a well thought out plan - although to war is ALWAYS on the table if their grasp slips. There may be better options on the table, but the way fascism is rearing up everywhere and technology is being leveraged into Big Govt./Big Business' favor at every turn - I am extremely doubtful that good times lay ahead.
The bankers are breaking a pool queue in half and dropping it on the floor and politicians are going to have 'try-outs'.
Politicians are breaking pool queues in half and throwing them on the ground for business tryouts. And businesses throw employees into the arena as if everyone is in comptetition..
Very ugly indeed. We must do our best to not fall into this thinking. The system isn't going to change 'easily' - I'm only hoping that some preperation will help in extracating myself and those I care about out of this bullshit nightmare (which is very doubtful without A LOT of help from those around me, i.e. community/county).
/ramble off - take care - Merry Christmas damnit
Excellent commentary. As for what they are buying time for ? Consider this angle...seems to me like they have been patiently getting the pieces in place for decades. Time to run the infinite growth model in Asia, it's where the most upcoming consumers are by far.
https://www.corbettreport.com/the-great-decoupling-how-the-west-is-engin...
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They are simply making sure who the last man standing will be. So the money to buy the corrupt must continue without pause. Yep I know it sounds like tin foil. The thing is its provable.