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Bank Confusion

What the heck are “Excess Reserves?”  Wikipedia defines them as: “In banking, excess reserves are bank reserves in excess of a reserve requirement set by a central bank. They are reserves of cash more than the required amounts.”  Well, that clears it up well!  Not!!  I have been reading in so many places that the Fed is contemplating reducing, or even eliminating the interest it pays to banks on these excess reserves, which, if they Fed pays interest on the money in the first place would seem to imply that this money belongs to the banks.  Why else would they be paid interest on the money, right?

But this mystery is not so easily solved.  In the accompanying chart, published by the Fed Board of Governors, it would seem that there were no excess reserves at all in the history of the U.S. banking system until the crash of 2008, at which point growth of excess reserves has been spectacular.  Current disclosures have these excess reserves that banks hold on deposit at the Fed totaling about $2.5 Trillion.




What happened in the period 2008 through today?  Have banks all of a sudden, and in the midst of the most significant banking crisis in modern times found $2.5 Trillion of extra money lying around their vaults?  Have they then collectively decided that they don’t know what to do with it so they had better give it to the Fed in return for a seemingly paltry 0.25% annual return?

The Wikipedia definition above, and the way people in economics refer to these “excess reserves,” would lead one to believe that this may be true and that this money does belong to the banks.  I've been reading up on this and everywhere I look I keep reading how the Fed is paying banks this 0.25% rate on their reserves.  This just seems very odd to me.  One of the more puzzling quotes I found was this from a November article from the Financial Times: “When the Fed buys assets under its programme of quantitative easing, it pays for them by creating reserves. As a result, banks have piled up almost $2.5tn in their reserve accounts at the Fed.” What does this really mean?  Can anyone out there explain this?  Does this quote state that when the Fed prints money it creates, for reasons I couldn't even imagine, a liability to the banks??  Why on earth would this be the case?  Help!

I’I've read that the big six (JPM, BAC, C, WFC, GS, MS) hold 67% of all bank assets (and the other 6,934 banks hold the remaining 33%).  I just checked and found that these six have combined balance sheet equity of under $1 Trillion, and assuming that equity tracks assets somewhat closely, that would imply that the entire banking system has balance sheet equity of about $1.5 Trillion.  So, again I must admit to being confounded.  What are the $2.5 Trillion in excess reserves?  To whom do they belong?  Where do they come from?  Does anyone out there have any insights?

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