Fed proposes term deposits to drain excess bank reserves
Posted: 29 December 2009 0458 hrs

	Photos 1 of 1 US Federal Reserve building

WASHINGTON: The US Federal Reserve on Monday proposed the creation of a term-deposit facility for banks to drain some of the more than 1.0 trillion dollars in excess reserves from the banking system.

The Fed said it was seeking public comment on proposed amendments to the reserve requirements for institutions eligible to receive earnings on their accounts at Federal Reserve Banks.

"Under the proposal, the Federal Reserve banks would offer interest-bearing term deposits to eligible institutions through an auction mechanism," the central bank said in a statement.

"Term deposits would be one of several tools that the Federal Reserve could employ to drain reserves to support the effective implementation of monetary policy," it said.

Institutions holding term deposits would "receive earnings at a rate that would not exceed the general level of short-term interest rates," according to the Fed proposal.

Term deposits would allow the Fed to effectively ring-fence from the rest of the US banking system the huge reserves that some banks have accumulated, seen as an inflation risk.

The excess reserves - reserves not required to be held against deposits - are currently estimated at more than 1.0 trillion dollars.

Since October 2008, when the global financial crisis threatened to collapse the US financial system, the Fed has paid earnings on both mandatory and excess reserves at a interest rate tied to its federal funds rate.

The central bank has kept its base rate at near zero since December 2008.

The Fed said its proposal would be published "shortly" in the Federal Register, which will start a 30-day public comment period. - AFP/de