Segregated Balance Accounts

Abstract

This paper describes segregated balance accounts (SBAs), a concept for a new type of account that could provide increased competition for deposits, reduce system-wide balance sheet costs, and improve the transmission of monetary policy by facilitating greater pass-through of interest on excess reserves (IOER). SBAs are designed to remove credit risk by creating narrow accounts that could allow any bank to compete for money market funds. Because of increased competition, the rates paid on borrowings secured by SBAs, along with other money market rates, would likely be pushed up closer to the IOER rate and would be more tightly linked to that rate. SBAs could promote a more efficient allocation of reserves within the banking sector by shifting reserves from banks with high balance sheet costs to banks with low balance sheet costs. SBAs would not require setting an additional administered rate; IOER would be paid on the balances held in an SBA and the rate paid on the loan secured by the balances in the SBA would be competitively determined. We discuss a number of potential risks that SBAs could pose as well as further steps that would be required before SBAs could be implemented.

Eurosystem's Asset Purchases and Money Market Rates

“…We will use the results derived in the context of the post-2008 US federal funds markets, to explain part of the decline of money market rates below the deposit facility rate. Contributions to this literature include for instance Bech and Klee (2011), Martin et al (2013), Garratt et al (2015) or Armenter and Lester (2017), as detailed in section 2.…”

Foreign Banks, Liquidity Shocks, and Credit Stability

“…16 During the FDIC policy change, the Fed has paid interest on both required and excess reserves, at a rate of 25 basis points. 17 A second force that can induce foreign banks to use the less costly access to wholesale funding to hoard liquidity, instead of extending loans, could be the limited ability of foreign banks to replace domestic banks in extending of loans. Several studies stress that foreign banks may serve only large and transparent customers ("cherry-picking" behavior).…”

“…Martin, McAndrews and Skeie (2013) construct a general equilibrium model in which large reserve balances can crowd out bank lending in the presence of balance sheet costs and interest on reserves 18. There are also anecdotal examples that banks' balance sheet costs have increased substantially in the wake of the financial crisis (see, for instance,Garratt, Martin, and McAndrews, 2015). Basel III regulation has indeed incentivized some banks to keep liquid assets and/or to shrink their balance sheets.…”

The History and Economics of Safe Assets

“…This is not currently the case. Garratt,Martin, McAndrews and Nosal (2015) discuss segregated balance accounts but not securitization.…”