Fitch considers it likely that the ECB's rate move will spark some redeployment of European bank liquidity, primarily to euro government bonds, but the Fed deposit option is another possibility. The ECB's move was part of a package of steps broadly intended to fight further weakening of the European economy and the risk of deflation.
The Fed presently offers US banks 0.25% returns on both required and excess reserves, a rate that has held steady since
The effect of the Fed's reserve rate adjustment over the past six years has been to vastly expand the amount of deposits that US and foreign banks maintain at the Fed above the required reserve levels. Excess reserves held at the Fed have trended higher every year since the rate was initially adjusted. Total deposits held currently stand at approximately
The ECB's rate decision makes the carry trade of swapping euros into dollars and placing the dollars on deposit with the FED 10 bps more attractive than previously, although the complexity and additional capital charge of adding a swap to a deposit still make this facility less attractive than same currency opportunities. As of the end of
Prior to the Fed's payment of interest on excess reserves, foreign banks held small amounts of cash in the U.S. In 2008, only 5% of
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Source: Fitch Ratings
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