Mostly Economics

Paul De Grauwe and Yuemei Ji in this voxeu research article point how central banks have transferred massive amount of their profits to banks:

One legacy of quantitative easing (QE) is that banks have accumulated huge amounts of bank reserves.  As a result, the bank reserves market is characterised by a large excess supply. This has kept the money market (interbank) rate stuck at the zero lower bound for many years, until the central banks felt compelled, from early 2022 on, to raise interest rates to fight inflation.  Given the excess supply of bank reserves central banks could only perform this feat by raising the rate of remuneration of bank reserves. As a result, this rate of remuneration became the new (not zero) lower bound in the money market (De Grauwe and Ji 2023a, 2023b).

This policy now has created a lot of ‘collateral damage’. Since the stock of bank reserves is extremely high, the central banks now pay out large amounts of interest rate remunerations to banks, which increase with every interest rate hike. We show this in Table 1. This presents the outstanding bank reserves in the euro area, the US, and the UK in May 2023. We also show the interest rates prevailing at that time (second column). The third column presents the total interest payments made by the respective central banks to their domestic banks. The last column expresses these as a percent of GDP.

These are substantial numbers. To give some perspective, these interest payments exceed the seigniorage gains (profits) of modern central banks. For the US, for example, it has been estimated that seigniorage gains are less than 0.5% of GDP (Barro 1982, Cutsinger and Luther 2022). ¹ Thus, as a result of their anti-inflationary policies, central banks transfer more than the total seigniorage gains to private banks. An extraordinary outcome of the fight against inflation. This is all the more spectacular as the seigniorage gains of central banks find their origin in the monopoly power granted by governments to central bankers. One would expect that these monopoly profits would then be returned to the government. Instead, they are returned more than fully to private agents.  

Solution?

We believed that a two-tier system of minimum reserves is a reasonable alternative to the present system that subsidises banks in an exorbitant and unsustainable manner.  We found out, however, that this is not generally considered to be reasonable. The resistance of central bankers and many economists (cheered on the sidelines by bankers) to the use of minimum reserve requirements is formidable.  ² This led us to ask the question of where this hostility comes from.

There are just so many threads on linkages between central bank policy and commercial banks.