What are Borrowed Reserves?
In the United States, borrowed reserves have to do with the amount of funds that are extended upon request to the Federal Reserve Bank system by the federal government. The purpose of the borrowed reserve is to allow any banks that are classified as member banks of the Federal Reserve system to maintain the reserve requirement that is necessary in order to operate. A reserve requirement is simply the amount of funds and assets that is required for a bank to hold in cash or on deposit in order to be recognized by the Federal Reserve System. In most cases, the amount of the requirement is calculated based on a percentage of the demand deposits and time deposits that are in the possession of the bank. In some areas, the reserve requirement is referred to as a reserve ratio. Borrowed reserves are made available to ensure that member banks are able to secure assistance in meeting the reserve ratio, regardless of current economic conditions. Because the extension of borrowed reserves is prov
Money borrowed from the Fed’s discount window (3.5%). So what caused this unprecedented event? The creation of the Term Action Facility [TAF] charged with lending $40 billion at auction this past January 29th. The interest rate for a one month loan ended up being set (by auction) at 3.123%.The banks ended up borrowing at a reasonable rate while using a “wide variety of collateral” (Fed quote). That is why the non-borrowed reserves suddenly dried up. The banks get to borrow at a reasonable interest rate while putting up questionable collateral with no “discount window stigma” attached. Non-borrowed reserves will rebound soon. Banks earnings will rebound soon. This is only a short anomaly engineered by the Fed to bail out the banks.
