40% Of The Fed’s Interest On Excess Reserves Is Paid To Foreign Banks

Even as both the Fed and Wall Street are gripped by a raging debate over when, how and how much the Fed should shrink its balance sheet, most appear to be ignoring the $2.1 trillion elephant in the room: the fact that every incremental increase in the Fed Funds rate (also an increase in the Interest On Excess Reserves, or IOER, currently at 1.25%) is a handout to US commercial banks, but that the direct recipient of this explicit Fed subsidy are a substantial number of foreign banks.
Here are the numbers:
as of the week of July 5, there were $2.1 trillion in reserves (of which the vast majority is “excess”), the largest liability by far on the Fed’s $4.5 trillion balance sheet (currency in circulation is the other major component and amounts to $1.5 trillion). as of the latest Fed rate hike, IOER is 1.25% Putting these together, means that as of this moment, assuming no more rate changes, Janet Yellen will pay out $27 billion in interest on reserves parked with the Fed every year.

This post was published at Zero Hedge on Jul 13, 2017.