News Column

Fitch: ECB's Rate Move May Further Increase Deposits With US Fed

June 6, 2014



NEW YORK--(BUSINESS WIRE)-- The European Central Bank's move yesterday to cut from zero to minus 10 bps the rate that its member banks receive on excess reserves could drive European banking institutions to place more monies at the US Federal Reserve through their US branches, according to Fitch Ratings.

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 October 2008. At that time, the reserve rate was lifted from 0% to ease the implicit tax that reserve requirements represented for US regulated banks. The Fed continues to evaluate its reserve rate for appropriateness.

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 $2.6 trillion, well above the total $135 billion of required reserves.

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 April 2014, about 50% of the total $2.6 trillion of excess reserves held at the Fed was from foreign banks.

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 $1.3 trillion of foreign banking assets were held in cash. The most recent Fed data shows that cash represents over 55% of the $2.5 trillion in foreign banking assets in the US. This cash is largely held at the Fed, reflecting a greater emphasis on maintaining available liquidity and the ability to earn positive carry on surplus short-term US dollar funding.

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.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Jaymin T. Berg, CPA

Director

Financial Institutions

+1 212 908 0368

or

Matthew Noll, CFA

Senior Director

Fitch Wire

+1 212 908 0652

33 Whitehall Street

New York, NY

or

Media Relation:

Brian Bertsch, +1-212-908-0549 (New York)

brian.bertsch@fitchratings.com


Source: Fitch Ratings


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