Why Is It So Hard For Banks To Pay Retirees Interest?

Posted by Evan Garcia on

Everyone seems to be aware Taxpayers lose money on a lot of things.


But, did you know Taxpayers lose $36 billion annually to allow private banks to keep their excess cash at the Federal Reserve?


The average savings account pays only 0.10% annually, that’s 1/10th of 1%


(and many of the country’s biggest banks pay less than that. )


For example, If you were to put $5,000 in a regular Chase savings account (paying 0.01%) today, in a year you would have collected only 50 cents in interest.




Is that because banks are having trouble generating interest? Or something more sinister?


Here’s the issue, banks themselves are earning 2.4% on their deposits at the Federal Reserve.


These deposits, called “excess reserves,” include the reserves the banks got from our deposits, on which they are paying almost nothing; and unlike with our deposits, there is no $250,000 cap on the sums banks can stash at the Fed amassing interest.


A whopping $1.5 trillion in cash is now sitting in Fed reserve accounts. The Fed rebates its profits to the government after deducting its costs, and interest paid to banks is one of those costs.


That means we the taxpayers are paying $36 billion annually to private banks for the privilege of parking their excess reserves at one of the most secure banks in the world — parking their reserves rather than lending them out.


The banks are getting these outsized returns while taking absolutely no risk, since the Fed as “lender of last resort” cannot go bankrupt.


This is not true for other depositors, including large institutions such as the pension funds that hold our retirement money.


As Matt Levine notes in a March 8 article on Bloomberg:


“If you are a large institutional cash investor—a money-market fund, a foreign central bank, things like that—then in some sense you have no way to keep your money perfectly safe…. The closest that big non-banks normally get is “overnight general collateral repo”:

You give your money to a bank, and the bank gives you back a Treasury security as collateral, and you can get your money back the next day.


This arrangement is reasonably safe for the institutional investor, which can withdraw its money on a day’s notice; and it gets interest that is close to 2.4%.


But the bank is using the investor’s money to run its business, and the bank is leveraged.


The money it gets from repoing Treasuries is used to buy other things and to trade in stocks, bonds, derivatives and the like.


This makes the repo business highly risky for the market as a whole, as was seen when a run on the repo market triggered the credit crisis of 2008-09.


As Jennifer Taub explained the problem in a 2014 article in The New York Times titled “Time to Reduce Repo Run Risk”:


An overnight repo would be like you having a car loan that is due in full every morning and if the lender does not renew your loan that day, you need to find a new one, each and every day or they take your car away.


When trust is strong and cash plentiful, repos are rolled over.


When trust reasonably erodes, or there is a panic, cash is demanded from the repo borrowers who might have to sell the collateral or relinquish it….


Besides impairing its ability to target interest rates, the Fed is worried that incentivizing banks to pay depositors more will take funding away from regular banks, making it harder for those banks to trade stocks and bonds (a business largely funded by repo) as well as jeopardizing their lending business.


The Federal Reserve Bank of New York has repeatedly warned of the repo “fire sale” risk in numerous sources.


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