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Segregated balance accounts

Rodney Garratt (), Antoine Martin (), James McAndrews () and Ed Nosal ()

No 730, Staff Reports from Federal Reserve Bank of New York

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.

Keywords: interest rate; central bank (search for similar items in EconPapers)
JEL-codes: E58 E42 E50 E40 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2015-05-01, Revised 2015-08-01
New Economics Papers: this item is included in nep-mac and nep-mon
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