Before the Great Financial Crisis (GFC) bank reserves were typically around $0.2tr, as banks only held cash at the Fed for regulatory reasons – the Fed paid zero percent interest on them. The GFC prompted a number of phases of Fed bond buying – quantitative easing (QE) – which meant banks built reserves (other side of the QE trade). To facilitate this, the Fed remunerated banks at a newly introduced rate on reserves (currently 4.4%). Fast forward to the subsequent pandemic-induced QE, and the US banking system has become structurally characterised as a large reserve volume one. At the same time, recent years have ... (full story)