Treasury Deposits and Excess Bank Reserves

Article excerpt

01.11.10

An interesting development on the Federal Reserve's balance sheet is a decline in excess bank reserves. This decline has occurred despite an increase in the overall size of the Fed's balance sheet. The key factor accounting for the decline in excess reserves is a substantial increase in U.S. treasury deposits at the Fed, which were made as a consequence of having issued new debt. When the treasury issues debt to the public and deposits the proceeds at the Fed in its general account, bank reserves decline. In normal times, the treasury typically holds some proceeds in Treasury Tax and Loan accounts at commercial banks, which keeps reserves in the banking system. This arrangement helps maintain, a steady supply of reserves--a desirable outcome for when the Fed sought to keep the fed funds rate neat a target rate.

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Following the collapse of Lehman Brothers in September 2008, the Federal Reserve instituted a number of policies that sharply increased bank reserves in excess of required levels. …