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It’s Wednesday, and before we get to the music segment, I document some developments in the banking system which are not receiving much press at the moment. I refer to the fact that the rate hikes now being implemented by most central banks are not just allowing the commercial banks to widen spreads between deposit and lending rates which will generate significant windfall profits for the banks and their shareholders. The increasing interest rates are also delivering massive cash injections to the banks who hold reserve accounts at the central banks. Why? Because the quantitative easing programs from the past have resulted in a massive buildup of excess reserves which are liabilities for the central banks. They are paying support returns on those reserve, which are scaled against the
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It’s Wednesday, and before we get to the music segment, I document some developments in the banking system which are not receiving much press at the moment. I refer to the fact that the rate hikes now being implemented by most central banks are not just allowing the commercial banks to widen spreads between deposit and lending rates which will generate significant windfall profits for the banks and their shareholders. The increasing interest rates are also delivering massive cash injections to the banks who hold reserve accounts at the central banks. Why? Because the quantitative easing programs from the past have resulted in a massive buildup of excess reserves which are liabilities for the central banks. They are paying support returns on those reserve, which are scaled against the
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It’s Wednesday, and before we get to the music segment, I document some developments in the banking system which are not receiving much press at the moment. I refer to the fact that the rate hikes now being implemented by most central banks are not just allowing the commercial banks to widen spreads between deposit and lending rates which will generate significant windfall profits for the banks and their shareholders. The increasing interest rates are also delivering massive cash injections to the banks who hold reserve accounts at the central banks. Why? Because the quantitative easing programs from the past have resulted in a massive buildup of excess reserves which are liabilities for the central banks. They are paying support returns on those reserve, which are scaled against the rising policy target rates. So the payments have escalated significantly and delivering a massive corporate welfare boost to the banks while the same interest rate rises are causing hardship to borrowers, especially those on low incomes. And amazing redistribution of income towards the ‘champagne socialists’ all via our central banks....And if those excess reserves were held as securities instead, the banks would still be getting the interest on the securities. QE increases banks' reserve balances when the cb buys government securities from commercial banks, a simple asset swap. (CBs do this in order to "increase bank liquidity," which is a monetarist error since doesn't work that way.)
In any event, it is "free money" for banks, in that both reserves held at the cb ("deposit accounts") and government securities held there ("time accounts") are default-risk free. But holding reserves instead also eliminates interest rate risk, i.e., falling securities values with increasing interest rates. So this is "free money" is more than one sense.
When the cb increases the interest rate, it pays the increased rate to banks based on their reserve balances at the cb. All part of the "ledgerdemain" of finance that the public doesn't see and is largely unaware. What the public does see is rising prices that are costs to them since interest rate increases are a price increase that is passed on to borrowers.
Bill Mitchell – billy blog
Champagne socialists in the banking sector reaping millions from public money
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia