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Fed: Will central bank reserves soon become insufficient? – BNP Paribas

Céline Choulet, analyst at BNP Paribas, points out that the US Fed has reduced the surplus central bank reserves that it had built up under its quantitative easing programme in the past four years.

Key Quotes

“Over the same period, the Basel 3 banking regulations have, however, significantly increased banks’ demand for central bank liquidity. Before Basel 3, all reserves in excess of “required reserves”, in the monetary policy sense of the term, were, justifiably, treated as excess reserves.”

“Since the new liquidity rules have come into force, only those reserves in excess of the regulatory constraint may be so treated. Although US banks have so far limited the initial effects of the reduction in reserves on their liquidity ratios, notably at the cost of increased dependence on the Federal Home Loan Banks, it would appear that the first signs of tension in liquidity are beginning to show.”

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