A reverse repurchase agreement is a short-term agreement to buy securities and then sell them back for a slightly higher price. Banks effectively hide their excess reserves from the Fed rather than loaning them out at a significantly higher rate, even though the Fed removed all of its regulatory reserve requirements last year.

QE sterilized

As Shvets has said, the roughly US $ 4 trillion that US banks currently have on deposit with the Fed (about 20% of US GDP) actually sterilizes the quantitative easing program to a large extent. Fed – its monthly purchases of US $ 120 billion in bonds and mortgages.

Bank deposits with the Fed are equivalent to the increase in the size of the Fed’s balance sheet, now over $ 8 trillion, since the start of the pandemic.

Eurozone banks are doing something similar, but on an even larger scale.

They parked around 3.3 trillion euros (5.2 trillion dollars), or 30% of the area’s GDP, with the European Central Bank.

Japanese banks have the equivalent of about 100 percent of Japan’s GDP (about $ 6.4 trillion) within the Bank of Japan and British banks have £ 830 billion ($ 1.5 trillion) , or 42 percent of GDP, deposited with the Bank of England.

Large amounts of reserves

Shvets’ explanation for the large amounts of bank reserves stored in (virtual) central bank vaults is that banks do not see a demand for the money central banks inject into their systems.

There are simply no business opportunities for them to lend and create the credit multiplier effects that motivated the implementation of quantitative easing programs.

According to data from the Fed, the proportion of assets of the largest US banks held in the form of loans and leases has declined over the past year (nearly 10%) even as bank holdings of securities of the Treasury and government agency securities rose (up more than 33 percent).


Over the past 12 months, total commercial and industrial loans on all U.S. commercial bank balance sheets have grown from over $ 3 trillion to about $ 2.5 trillion, even as the U.S. economy has shrunk. strongly recovered after its pandemic nadir.

However, the problem is one of demand rather than supply. Banks do not see sufficient demand from borrowers with good credit standing to deploy the excess liquidity they hold.

There is a multiplier effect that occurs when banks lend money. This leads to multiple transactions – it increases the speed of money – as funds are spent on acquiring goods and services.

The reluctance of banks to lend, or the lack of sufficiently creditworthy opportunities, has created this perverse result where the volume of money has increased dramatically but its speed within financial systems has decreased.

It is not just the Fed’s balance sheet that has been inflated by this phenomenon, which is in many ways just an exaggerated version of what has been happening since the 2008 crisis.

Boost for financial assets

If the real economy’s demand for credit is insufficient, even as interest rates have collapsed to unprecedented levels and the volume of money in the system is also unprecedented, it bounces back to central banks. or ends up being invested in financial assets.

It is therefore not surprising that stock markets continue to push towards new highs, prices (as opposed to yields) of bonds have been inflated, commodities have been ‘funded’ and new forms of speculative activity ( think cryptocurrencies, NFTs or “meme” stocks) have grown.

The relative scarcity of demand for credit for business investment could be influenced by demographics and aging baby boomers, or the low-capitalization nature of new transformative technologies.


Another element, perhaps, could be the relatively low levels of economic growth recorded since 2008, when a host of new and capital-intensive regulatory requirements were imposed on the world’s banking systems, affecting their ability to lend. and modifying their psychology and economics. more risky end forms.

Shvets argues that despite the diminishing effectiveness of their quantitative easing programs – he likens it to “pulling a chain” – central banks are essentially stuck on their own.

Central banks cannot stop their quantitative easing programs because the consequences on financial market volatility and asset prices could be devastating, in turn unwinding the wealth effects they had worked so hard to create, a he declared.

“Retirees might find they don’t have a pension, derivatives might unwind and the same could happen to house prices,” he wrote.

Another way to approach the dilemma facing central banks is that while the main rationale for introducing quantitative easing programs was to support and encourage real economic activity, the impact of the programs on this primary focus has diminished to the point of almost disappearing.

However, the side effects of the programs on financial markets and asset prices in general have been and remain so great that withdrawing QE could trigger asset price implosions and another financial and economic crisis that would eclipse what is happening. passed in 2008-09.

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