Fed Pays Banks $12 Billion on “Excess Reserves,” Taken from Taxpayer Pockets

Circuitous hidden wonders of paying interest on “excess reserves.”

The Federal Reserve just went through its annual ritual of disclosing its preliminary results for the year: The income it earned less its operating expenses, according to central bank accounting, and how much of these earnings it is remitting, as it does every year, to the US Treasury Department. But this statement includes another nugget.

In 2016, the Fed paid our favorite banks $12 billion in interest on their “excess reserves” held at the 12 regional Federal Reserve Banks (the New York Fed, the Boston Fed, the Dallas Fed, the San Francisco Fed, etc.). But wait… who’s actually paying that $12 billion?

Is it just a well-earned freebie for the banks, conjured up out of nothing, in Fed-style? Nope. The taxpayer paid the $12 billion to the banks. Here’s how.

The Fed earns interest income from the $2.46 trillion in Treasury securities and from the $1.74 trillion in Agency mortgage-backed securities on its balance sheet. These are the securities the Fed bought from its Primary Dealers with money that it had created under the QE program. So now, it’s collecting the coupons. This is its income.

After subtracting its operating expenses ($709 million in 2016) and the interest it pays to the banks for their “excess reserves,” it remits the remainder to the Treasury Department. This is revenue for the US government, which can use every dime it gets.

According to the Federal Reserve Board’s preliminary estimates of its 2016 results, it will pay the Treasury Department $92 billion. That’s down from $97.7 billion it paid the Treasury in 2015.

Part of the reason why the payment is lower: the Fed is paying the banks more on their “excess reserves”; and this amount it pays the banks is deducted from the amount it pays the Treasury. Here are those infamous “excess reserves” that came into being as QE kicked off at the end of 2008:

As you can see, these excess reserves have dropped by about $775 billion since their peak at the end of 2014. They ended 2016 at $1.925 trillion.

But in December 2015, when the Fed raised the fed funds rate target for the first time in this tightening cycle, it also raised the interest rate it pays to the banks on the excess reserves, from 0.25% to 0.5%. This pushed up the amount it pays to the banks, despite their lower excess reserves, from $6.9 billion in 2015 to $12 billion in 2016.

The Fed says that it pays the banks for these excess reserves as a mechanism to get banks to raise their own lending rates when lending to each other, which, in theory, would contribute to raising market rates.

Some folks in the cheap seats might snicker that this is just a pretext, that surely if the Fed really wanted to raise market rates, it could find other means, such as selling down the assets on its balance sheet.

But here’s how the taxpayers end up paying that $12 billion to the banks. The Fed deducts that $12 billion from the amount it pays the Treasury. So the US government gets $12 billion less in revenues, a hole that all US taxpayers have to deal with forevermore. And the 2017 hole, which might even be larger, would add to it.

Don’t worry, the banks are happy. They include that income from the Fed in their earnings reports. And you can just buy their stocks to try to get your money back.

But not all may be well with those banks. They appear to have formed a circular firing squad. Read…  What’s Going on with the Banks? Citi Cuts Goldman to “Sell,” after Goldman Cut Citi to “Neutral”

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  60 comments for “Fed Pays Banks $12 Billion on “Excess Reserves,” Taken from Taxpayer Pockets

  1. Chicken says:

    Globalist elites are quite adept at screwing the taxpayer at every loophole they inserted into the code, we just exited another period of 8 years where no effort to correct this was made.

    • Edward E says:

      So I suppose we really shouldn’t be too surprised after Trump makes the majority of Americans piss-poor.

      • Gian says:

        Too late, Obama beat him to it.

      • Chicken says:

        Is that an admission you did not mind because you and your household benefited from the neoliberal skimming and scamming?

        • Chicken says:

          I agree, Bush also. This has been going on for several decades and has only accelerated.

        • NotMyPresident says:

          And we all know that unjustified wars sure aren’t cheap. I love it when people place blame for the fact the we aren’t yet out of the very deep hole that we were placed in 8 years ago.

        • Chicken says:

          No, we’re deeper and that’s the point entirely.

        • Frederick says:

          Just “pull it” and head to the dermatoligist

        • Edward E says:

          Hell no, I’m just a twucka with a beautiful Superstar big wig natural foods organic grocery company. Did you catch Fouke at his press conference yestiddy… he was full of piss and vinegar… well mostly p…

  2. Jim says:

    The Fed can create unlimited amounts of US currency and then ask banks to increase their reserves, while at the same time pay these banks interest in this Reserve money created. What have they done to deserve this “bonus”. Wasn’t the TARP funds enough to stabilize them? WOW.
    No wonder banks never lose, but the Fed only pays Americans ultra low interest on what they can save. When do we get a pile of cash to obtain interest.

  3. ras says:

    same guys that control the Fed control the banks. it’s what President Jackson, and others, warned about.

    • Frederick says:

      Finally figuring it all out huh guys? George Carlin tried to warn us

    • Dan Romig says:

      Before the 20 year charter on the ‘Second Bank of the United States’ expired in 1836, Andrew Jackson runs for a second term and wins. In 1833, president Jackson starts removing the Government’s deposits from the Rothschild controlled Second Bank, and deposits them into banks run by those outside of Rothschild’s sphere of power. This caused the Rothschilds to panic, so they contracted the money supply and sent the US into a depression.

      Jackson is determined to end the Second Bank charter, and states, “You are a den of thieves’ vipers, and I intend to rout you out, and by the Eternal God, I will rout you out.”

      Payback came to Jackson on 30 January 1835 when an assassin tries to shoot him, but somehow both of the assassin’s pistols misfired.

      Congress did not renew the charter for Second Bank in 1836, and in 1841, President John Tyler vetoed a Congressional Act to renew the charter.

      • David Parker says:

        And for the first and only time in history, the U.S. central government operated in the black, no deficit, no “loans” to repay, gold in the treasury, sufficient for all operations, no “income” tax, no IRS, no BATF, no standing army, no foreign wars of aggression, just liberty and justice (not just us) for all.

  4. Bruce Adlam says:

    The problem is the stupid taxpayer doesn’t complain enough until it goes badly wrong by then it’s way to late

    • Frederick says:

      Stupid doesn’t begin to describe them It’s been so very obvious for so long now

  5. NotSoSure says:

    That’s why I always said that muppets are the most dangerous people on earth.

    Muppets = taxpayers, etc who expect things to just run smoothly.

    Globalists, elites, etc have always been screwing muppets since the beginning of time, but the muppets always expect that to change. As someone said doing something again and again while expecting different results is the very definition of insanity.

    Occasional rev*l*ion is like a market correction i.e. it’s a necessity. And no, “elections” and “liking” things are not enough.

    • NotMyPresident says:

      Einstein had a lot of intelligent things to say, besides his small (grin) contributions to Physics.

    • Kent says:

      The global elite have the muppets believing that they must get into deep amounts of debt in order to put a roof over their heads ands that the “Free Market” will always obtain maximum outcomes for everyone.

      Once inside that box, you are owned.

  6. JB says:

    i always enjoy your insight into the feds workings (the cabal) .
    But almost 2 trillion in excess reserves ? no wonder we don’t
    have inflation – this money is not being circulated – no velocity here . lets go back to an article by Marshall Gittler some years back that explains why gold dumped ( well no inflation)
    This paying interest on excess reserves are a component of a new set of tools the fed has implemented to micro manage
    financial markets. rand paul is gaining momentum in auditing the fed- seems trump is on board . oh did the feds
    write down the MBS securities that went into foreclosure last recession ? this should have shrunk their balance sheet ?
    someone had to take the write down .

    • Steve says:

      So if they write down the loans the income statement will reflect this and even less will be remitted to the General Budget of the Feds.

      Again Taxpayer please bend over and take it. Oh yah, you better like it too.

      Same shit different day.

  7. nick kelly says:

    Excuse me for being off topic but I was watching the Tillerson hearings around noon (West coast of Canada time) and he casually dropped a bombshell. It was said as a afterthought at the end of his response and I don’t know if it registered or even if he meant it.

    He was being asked about plans to counter China’s expansion and specifically about its man- made islands. After some generalities, he ended with ‘and we will deny access to them’.

    It is one thing to ignore China’s absurd claims to the territory of at least six other nations- it is another to apparently plan to intercept Chinese ships. What other meaning can be put on ‘deny access’?

    Unless I misheard which I am almost sure I didn’t, I expect this to be ‘walked back’
    If the US actually does try to deny access, we may see literal fireworks.

      • nick kelly says:

        Thanks, read it. I can understand the US backing Japan in the largish natural disputed islands, which have been Japanese since 1895, it’s this that worries me.

        “Asked whether he supported a more aggressive posture toward China, he said: “We’re going to have to send China a clear signal that, first, the island-building stops and, second, your access to those islands also is not going to be allowed.”

        One thing I don’t know is whether the man-made islands are in another country’s territory. If they aren’t then I don’t see how China can back down.
        Of course I don’t support giving China any rights to surrounding waters but if they want to use some pinnacle of rock as a place to attach a base- well, anyone else could have done that in the past.
        Could it be like building a base in the Antarctic? Or a cabin in the woods?
        No doubt they WERE thinking of using these postage- stamp size bases to claim surrounding waters- so we ignore their claim and it will have to be China that first uses force.
        But saying you can’t go there- if this is to be policy then the US will have to use force.
        Will they have to be abandoned? Will the US visit them?

        I think there is a limit to the amount of ‘face’ China can lose and like it says in the Art of War, if you don’t want total war leave the adversary an escape route.
        I think it’s very important that the US (and or allies) not be the first to use force, but Tillerson’s words look otherwise.

        • nick kelly says:

          “Tillerson had better bone up on nuclear power strategies if he wants to force a big nuclear power to withdraw from its own territories,” said an editorial in the Global Times, a Communist-party controlled newspaper.

          “China has enough determination and strength to make sure that his rabble rousing will not succeed … Unless Washington plans to wage a large-scale war in the South China Sea, any other approaches to prevent Chinese access to the islands will be foolish.”

          From the Guardian’s site

          Again, I’m all for ignoring China’s illegal grandiose claims but this is different from interdicting their ships. If the US position is that that most of the South China Sea is international waters then Chinese ships have as much right of movement as anyone’s.
          As for these artificial islands, obviously constructed at enormous expense, China may not own the rocky outcrops on which they are built, but they do own, let’s say, the improvements.

          To avoid unnecessary and pointless provocation these should be given what the military calls a ‘professional’ distance- one mile?

          Other than that, ignore them. The position is that most of this area is international waters. If China wishes to challenge this, let them be first to use force.

      • Wolf Richter says:

        Thanks for posting the link. This is going to be interesting.

        • wratfink says:

          Here’s an alternate (“un” U.S. centric) viewpoint.

          Remember WWII? Where Japan invaded many, many, countries including China? Well, in 1946, after the defeat of Japan, China sent ships out to these previously owned Japanese islands and atolls and surveyed and mapped them out and claimed them as war spoils. Much the same as the US did with the Marshall Islands and Guam and the Bikini Atoll and even Hawaii (different era), for that matter.

          Also, according to the UN Law of the Seas agreements, some of these islands are a natural extension of the Taiwan archipelago and thus are owned by Taiwan. China still claims Taiwan as part of it’s land but refers to it as a “rogue” province.

          Besides, what business does the US have in an area called the South China Sea 3000 miles away? Oh, I know, oil and gas resources to be stolen and exploited by the Empire’s multinationals…maybe even Exxon-Mobil. There’s plenty , so they say, in the immediate vicinity.

    • Winston says:

      No fan of China here, but what are manmade islands in international waters other than unsinkable aircraft carriers, just like US carrier groups, only likely to be far cheaper and not mobile at all, therefore not being intended to be used or useful at all for the intimidation or deterrence of any nation outside of China’s immediate area… unlike the US carrier groups.

    • Willy2 says:

      – Never heard of the socalled “Pivot to Asia” ? And it actually already started during the G.W. Bush administration.
      (GOOGLE it, lots of links)

  8. JEM says:

    That should just about cover all the bonuses the bankers will pass out to themselves, courtesy of the American taxpayer.

  9. Sporkfed says:

    The whole interest on excess reserves skim reminds me of the pea under the shell con.
    As long as there are a minimum of 3 moves, Joe Public can’t follow the scam.

    • walter map says:

      Joe Public is carefully excluded from any knowledge that the shell game is even being played. He just wouldn’t understand, you see.

      For every one that doeth evil hateth the light. It’s SOP.

  10. Sobermoney says:

    The Obamaphobes want to blame him for our endemic Federal corporate welfare system.

    This legalized corruption started in earnest when Saint Reagan turned the Federals to a corporate run Trickle UP tax funnel. It got worse when Greenspan got off on his FOMC stock market intervention.

    Now, we see L. Ron Trump’s putsch to dismantle federal agencies – including social security and Medicare – while their respective budgets get funneled to his privatization cronies. It is a brilliant plan of elite Republican Party Kleptocracy.

    Look for public health and safety disasters,
    The end result will be a collapse of the Federal government as we know it.

    Finally, Trump is so stupid, he will create this scenario: China is going to come into Mexico and replace themselves when the US as Trump reneges in NAFTA. It will be called CHIMFA.

    • JEM says:

      Letting Wall Street get away with the crimes it did, and doing NOTHING to take away the privileges of the financial industry, will be remembered as the greatest failure of Obama’s presidency, especially when it all comes crashing down, which will be soon enough.

      • SoberMoney says:

        Yes, JEM, Obama was negligent in that regard. But I give him a break as he tried to be a uniter initially.

        In the end the corporate BODs should have at least fired these Wall Street CEO criminals with no additional financial remuneration.

        But we can see as that didn’t happen how corrupt Wall Street is and the incompetence of the financial media to hold their subjects accountable. This includes the SEC and the duopoly party Congress.

        Instead, they were rewarded lavishly and many are still running these financial institutions of ill repute.

        • Niko says:

          “But I give him a break as he tried to be a uniter initially.”

          Can you say that with a straight face?

    • Lee says:

      Ah you Trumpophobes just never give up, do you. You put out ridiculous statements that show lack of intelligence.

      Your posts perfectly illustrate why so many people voted for him.

      Public health in the USA has been a disaster since the US government expanded the Medicare and Medicaid.

      Obamacare (should be called zerocare) just pushed it over the edge.

      Social Security will be around for a long, long time.

    • David Parker says:

      Get real, you are a statist, you actually believe mankind cannot survive with a controlling elite (which you, as all statists, want to be in that number). You are completely lost in the fabricated smoke screen of politics, you probably believe that is such a thing as “right” and “left” that there was any substantial difference between the Nazis and the Communists and the Fascists, when in fact they are all merely steps toward totalitarian “government”.

      Don’t take my word for it, read the Gulag Archipelago, all three volumes.

      The scam started hundreds of years ago with “fractional reserve” banking.

      For us, it was the Federal Reserve Act of 1913, not “federal”, no “reserves”, just a protected counterfeiting scheme to exchange paper for actual physical gold, as in from Fort Knox to the Federal Reserve bank of New York, all done under the mantle of the U.S. Government.

  11. walter map says:

    Guns and ski masks are so passé. It just so much easier to type in the transfer and paper it over with some legal mumbo-jumbo.

    All the petty crime in the world is dwarfed by corporate crime by several orders of magnitude and never gets a mention on the local news, which is obsessively interested in an arrest over a shoplifted candy bar to the exclusion of billions the real crooks make off with.

    And you wonder why your towns and states have turned into shitholes. Sheesh.

  12. Justme says:

    Now you know why the Fed/FRB increased interest rates. It was because it was the most profitable move for banks, or as the FRB calls it, “the economy”.

  13. syka says:

    Wolf, quick one please: “According to the Federal Reserve Board’s preliminary estimates of its 2016 results, it will pay the Treasury Department $92 billion”. Does it Net with Market Losses due to the Rise in Rates ???

  14. John burchfiel says:

    I think I’ll just quite wearing underwear

  15. Mike R. says:

    The Fed supports/props up the big banks in every way shape and form it can as the banks play a critical/key role in maintaining America’s dominance in world finance…..all to support dollar hegemony (reserve currency status, petro dollar, dollar based loans around the world, etc) which is key for America’s power dominance.

  16. Tom Kauser says:

    Use it or lose it ( its just money)
    I buy bank stocks for dividend since any capital appreciation is most probably shadowy?
    (That giant sucking sound is not related to the change over!)

  17. Oneyedjack says:

    Geithner did us all a big favor by exposing himself as a stooge of the banking industry. Now everyone can see that the banks are working the deal from the inside. Geithner has assembled a phalanx of Wall Street flim-flam men to fill out the roster at Treasury. His chief-of-staff is lobbyist from Goldman Sachs. The new deputy secretary of state is a former CEO of Citigroup. Another CFO from Citigroup is now assistant to the president, and deputy national security adviser for International Economic Affairs. And one of his deputies also came from Citigroup. One new member of the president’s Economic Recovery Advisory Board comes from UBS, which is currently being investigated for helping rich clients evade taxes. The Obama White House is a beehive of big money guys and Wall Street speculators.

    The banking lobby has already set the agenda. All the hooplah about “financial rescue” is just a smokescreen to hide the fact that the same scofflaws who ripped off investors for zillions of dollars are back for their next big sting; a quick vacuuming of the public till to save themselves from bankruptcy. It’s a joke. Obama floated into office on a wave of Wall Street campaign contributions and now it’s payback time. Prepare to get fleeced. Geithner is fine-tuning a “public-private” partnership for his buddies so they can keep their fiefdom intact while shifting trillions of dollars of toxic assets onto the people’s balance sheet. They’ve affixed themselves to Treasury like scabs on a leper. Geithner is “their guy”, a Trojan Horse for the banking oligarchs. He’s already admitted that his main goal is to, “keep the banks in private hands”. That says it all, doesn’t it?

    Of course, the administration is not alone in its support for the banks and Wall Street. Congress has its fair share of bank-loyalists, too. That was evident last week at the hearings of the House Financial Services Committee. 8 CEOs of the nations biggest banks were marched off Capital Hill (ostensibly) for public rebuke. For a minute, it looked like Congress might do its job and actually grill the bastards who blew up the financial system. But, no, that’s not what happened. The 7 hours of testimony produced few fireworks and no mention of accountability. For the most part, the bankers were treated like honored guests instead of the chiselers they are. That’s because nearly every member of the committee rakes in contributions from the same banks that are being investigated. As Bill Moyers points out on Friday’s Bill Moyers Journal, “Last year, the securities and investment industry made $146 million in campaign contributions. Commercial banks, another $34 million.” The banks own congress just like they own the White House and anything else of value in the USA. They left the hearings unscathed.-Memory lane Old article same scam different day.Cant wait for digital currency fraud MWO can steel at whim

    • Smingles says:

      Geithner will be out soon enough, but it doesn’t matter.

      Meet the new boss, same as the old boss.

      Steve Bannon, senior advisor, Goldman Sachs
      Dina Powell, senior advisor, Goldman Sachs
      Anthony Scaramucci, senior advisor, Goldman Sachs
      Steve Mnuchin, nominee for Treasury Secretary, Goldman Sachs
      Jay Clayton, nominee to chair SEC, lawyer at Sullivan & Cromwell (Wall Street firm) who represent… you guessed it, Goldman Sachs
      Gary Cohn, Chief Economic Advisor, Goldman Sachs

  18. Tom Kauser says:

    The fed takes-in capital from all four corners of the globe and since 2008 pulls it out thru remittances to its members (dividends)?
    These dividends are spent back into the economy as the banker receives his bonus to pay his judge/congressperson for any private service

  19. Tom kauser says:


  20. chris Hauser says:

    i still haven’t heard an adequate replacement.


  21. rvette454 says:

    The next step in the scenario, if this story is to be believed, is “your children will pay for the governments spending today”. How a contrived economic philosophy pervades everyday life is absurd in itself. Taxes pay for nothing, but decrease the amount of money movement in the economy eventually. Federal spending increases the money supply, dollars available for continued growth in the economy.

    • Wolf Richter says:

      And where, may I ask, does the money come from that the Federal Government spends, if not from taxes and borrowing (future taxes and borrowing…)?

      • Willy2 says:

        – What about just (literally) print the money (banknotes) ? But then the US will be on the road to Hyper-Deflation and after that to Hyper-Inflation.

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