WASHINGTON- The interest paid by the Fed to major banks last year jumped to $12 billion as the central bank’s chief tool for raising rates nationally provided a boon to some of the country’s largest financial institutions.
In preliminary estimates of its 2016 results, the Fed said that its year-end remittances to the U.S. Treasury are expected to fall to $92 billion, down $5.7 billion from a record $97.7 billion transferred in 2015.
Part of the decline is due to a drop of about $2.6 billion in what the Fed earns on its holdings of U.S. Treasury bonds and mortgage-backed securities accumulated in fighting the 2007 to 2009 financial crisis.
But most of it is a result of the interest paid on excess reserves held by commercial banks at the 12 regional Federal Reserve institutions. Banks are required to hold some reserves, but are allowed to deposit more if they choose.
Between more cautious lending and weak economic growth, total reserves have been at historically high levels since the financial crisis -- roughly $2 trillion as of the end of the last year compared with a few billions of dollars in more typical times.
When the Fed increased its target interest rate in Dec. 2015 by a quarter of a percentage point, to a range of between 0.25 and 0.5, it increased the rate paid to banks as well - and pushed its overall reserve interest costs from $6.9 billion in 2015 to $12 billion last year. - Reuters