Ahead of the Crisis

Before 2008, the costs and benefits of holding reserves were clear october. The fee included foregone interest, and also the advantages included guarding against last-minute outflows that needed instant cash, much as a depositor might put aside cash to pay for crisis costs, or an investor might hold reserves allowing him to seize a unexpected possibility. If your bank did require extra funds, it might get reserves through a loan that is overnight the federal funds market, where banking institutions with additional reserves provide to many other banks. The essential difference between just what a bank could lend and what it might borrow represented the benefit of keeping a book asset versus the chance cost of lending it away.

The amount that is total of into the bank system ended up being set because of the Federal Reserve, mostly through open-market operations that provided and withdrew reserves through the market, so that you can support the federal funds price. (more…)

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