How the High Level of Reserves Benefits the Payment System

Morten L. Bech, Antoine Martin and James McAndrews

No 20120227, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Since October 2008, the Federal Reserve has increased the size of its balance sheet by lending to financial intermediaries and purchasing assets on a large scale. While these actions have increased the amount of reserves in the U.S. banking system and therefore raised concerns about excessive bank lending and inflation, we can document an important and overlooked benefit of the high level of reserves: a significantly earlier settlement of payments on Fedwire, the Federal Reserve’s large-value payment system. Quicker settlement on Fedwire improves liquidity throughout the economy, reducing uncertainty and risk for people and firms that rely on banks. At the same time, the Fed has been extending less intraday credit, which reduces the public’s risk exposure.

Keywords: Large balance sheet; payment systems (search for similar items in EconPapers)
JEL-codes: E4 E5 G2 (search for similar items in EconPapers)
Date: 2012-02-27
New Economics Papers: this item is included in nep-mac and nep-mon
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