Magazine article American Banker

Interest on Fed Reserves Would Cost $1.2B, CBO Says

Magazine article American Banker

Interest on Fed Reserves Would Cost $1.2B, CBO Says

Article excerpt

The banking industry has suffered a setback in its crusade for legislation allowing the Federal Reserve to pay interest on required reserves.

New estimates from the Congressional Budget Office peg the move's cost at $1.2 billion over 10 years. The finding sharply contradicts an analysis by the American Bankers Association, which said in July that the government would earn about $1 billion in 10 years paying interest on reserves.

Still, the CBO price tag is significantly less than prior government estimates, which put the cost at more than $500 million a year.

Reserve balances have become a hot political issue for bankers, who complain that they lost more than $700 million in 1996 by keeping reserves in interest-free accounts.

"It is only fair for us to receive interest on our investment," said Michael E. Grove, president of First National Bank of White Sulphur Springs, Mont. "These are monies that the Treasury is using and we are not."

Most large banks have created elaborate sweep programs to cut their losses. These systems periodically transfer cash in corporate checking accounts to money market accounts, which are not subject to the Fed's 10% reserve requirements.

Fed officials have warned that these moves have led to a precipitous decline in reserves that could hurt the central bank's ability to control the economy. The Fed manipulates short-term interest rates via the overnight credit market for excess reserves. The fall in reserves has made this market more volatile, making it harder for the Fed to keep rates steady.

Rep. Jack Metcalf, R-Wash., introduced a bill in July authorizing the Fed to pay interest on reserves and giving banks permission to pay interest on business checking accounts. Senate Banking Committee Chairman Alfonse M. D'Amato also has pledged to support paying interest on reserves. …

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