Negative Non-Borrowed Reserves: Much Ado About Nothing

by: Jeffry Kennat

Negative non-borrowed reserves! Oh my God! Run for your lives! The fear concerning this non-event was running rampant on the blogs Wednesday.

What are non-borrowed reserves? Mostly money borrowed from other banks at the Federal Funds rate (3%).

What are borrowed reserves? Money borrowed from the Fed's discount window (3.5%).

So what caused this unprecedented event? The creation of the Term Action Facility [TAF] charged with lending $40 billion at auction this past January 29th.

The interest rate for a one month loan ended up being set (by auction) at 3.123%.The banks ended up borrowing at a reasonable rate while using a "wide variety of collateral" (Fed quote). That is why the non-borrowed reserves suddenly dried up. The banks get to borrow at a reasonable interest rate while putting up questionable collateral with no “discount window stigma” attached.

Non-borrowed reserves will rebound soon. Banks earnings will rebound soon. This is only a short anomaly engineered by the Fed to bail out the banks.