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Segregated balance accounts

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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.

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  • Rod Garratt & Antoine Martin & James J. McAndrews & Ed Nosal, 2015. "Segregated balance accounts," Staff Reports 730, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:730
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    References listed on IDEAS

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    1. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    2. Antoine Martin & James J. McAndrews & Ali Palida & David R. Skeie, 2013. "Federal Reserve tools for managing rates and reserves," Staff Reports 642, Federal Reserve Bank of New York.
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    4. Antoine Martin & James McAndrews & David Skeie, 2016. "Bank Lending in Times of Large Bank Reserves," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 193-222, December.
    5. Bech, Morten L. & Klee, Elizabeth, 2011. "The mechanics of a graceful exit: Interest on reserves and segmentation in the federal funds market," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 415-431.
    6. Gara M. Afonso & Alex Entz & Eric LeSueur, 2013. "Who’s Lending in the Federal Funds Market?," Liberty Street Economics 20131202, Federal Reserve Bank of New York.
    7. Evan Gatev & Philip E. Strahan, 2006. "Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market," Journal of Finance, American Finance Association, vol. 61(2), pages 867-892, April.
    8. Han Chen & Jim Clouse & Jane Ihrig & Elizabeth Klee, 2016. "The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 921-955, August.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Pitfalls of a Reserves-only Narrow Bank
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-09-24 12:03:16

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    Cited by:

    1. Rod Garratt & Sofia Priazhkina, 2022. "Regulatory Requirements of Banks and Arbitrage in the Post-Crisis Federal Funds Market," Staff Working Papers 22-48, Bank of Canada.
    2. Krislert Samphantharak & Scott Schuh & Robert M. Townsend, 2018. "Integrated Household Surveys: An Assessment Of U.S. Methods And An Innovation," Economic Inquiry, Western Economic Association International, vol. 56(1), pages 50-80, January.
    3. W. Arrata & B. Nguyen & I. Rahmouni-Rousseau & M. Vari, 2017. "Eurosystem’s asset purchases and money market rates," Working papers 652, Banque de France.
    4. Arrata, William & Nguyen, Benoît & Rahmouni-Rousseau, Imène & Vari, Miklos, 2020. "The scarcity effect of QE on repo rates: Evidence from the euro area," Journal of Financial Economics, Elsevier, vol. 137(3), pages 837-856.
    5. Grossmann-Wirth, V. & Vari, M., 2016. "Sortie de taux bas en situation d’excédent de liquidité : l’expérience de la Réserve fédérale américaine," Bulletin de la Banque de France, Banque de France, issue 206, pages 41-50.
    6. Yushi Endo & Takushi Kurozumi & Takemasa Oda & Kenichirou Watanabe, 2015. "Monetary Policy: Its Effects and Implementation: Summary of the 2015 BOJ-IMES Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 33, pages 1-24, November.

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    More about this item

    Keywords

    interest rates; central banks;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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