Fed Proposes Sale of Deposits to Banks

The Federal Reserve Board on Monday proposed a program to sell term deposits to banks to help mop up some of the $1 trillion in excess reserves in the U.S. banking system.

Fed Chairman Ben S. Bernanke is preparing tools and strategies to soften or neutralize the inflationary impact from the biggest monetary expansion in U.S. history. Central bankers are also conducting tests of reverse repurchase agreements and discussing the possibility of asset sales.

The Fed has expanded its balance sheet to $2.2 trillion through several liquidity programs, including purchases of $1.25 trillion in mortgage-backed securities. Excess reserves constitute cash held by banks in excess of what they are required to keep against deposits. The Fed proposal says the term deposits could be sold in an auction or through a formula.

The "maximum-allowable rate for each auction of term deposits would be no higher than the general level of short-term interest rates," the central bank said.

Short-term interest rates "would be defined as the primary credit rate and rates on obligations with maturities of up to one year in which eligible institutions may invest, such as rates on term federal funds, term repurchase agreements, commercial paper, term Eurodollar deposits, and other similar rates," the Fed said.

The term deposits, which would be Fed liabilities similar to consumer deposits sold by banks, could be used as discount window collateral, the central bank said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER