So the Federal Reserve is reporting that interest on excess reserves (IOER) payments hit .9 billion in 2017. This amount is more than double the dollar size of the IOER payments in 2016 as seen below. This increase is understandable given the rise in the Fed's short-term interest rate target and the size of its balance sheet. But, as I have noted before, this is horrible optics. For the largest recipients of the IOER payments are large domestic banks and foreign banks. As seen in the figure below, they hold most of the excess reserves and therefore earn most of the IOER payments. Put differently, the systematically-important or "too-big-to-fail" banks that were bailed out during the crisis and are still implicitly subsidized by the government as well as foreign banks are the
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Update: To clarify the difference between a corridor and floor system, here is a figure distinguishing the two approaches from the NY Fed. Note in both cases the IOER remains.
1Just because a corridor system would have fewer reserves does not mean it would necessarily be a "scarce-reserve" balance sheet. Reserve scarcity is not about the quantity of reserves, but about their supply relative to their demand. All a smaller Fed balance sheet does is affect the supply of reserves. The Fed can also reduce reserve demand by lowering IOER. Depending on how it adjusts IOER will determine whether there is reserve scarcity. Consequently, observers need to be careful to avoid automatically associating small reserve balances with reserve scarcity.
2In the current floor system, IOER is above short-term market interest rates and is the source of many problems with the system.