SegregatedBalanceAccounts-FederalReserveBankof.PDF

Federal Reserve Bank of New York Staff Reports Segregated Balance Accounts Rodney Garratt Antoine Martin James McAndrews Ed Nosal Staff Report No. 730 May 2015 Revised August 2015 This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. Segregated Balance Accounts Rodney Garratt, Antoine Martin, James McAndrews, and Ed Nosal Federal Reserve Bank of New York Staff Reports , no. 730 May 2015; revised August 2015 JEL classification: E40, E42, E50, E58 Abstract This paper describes segregated balance accounts (SBAs), a concept for a new type of account that could provide increased competition for deposits, reduce system-wide balance sheet costs, and improve the transmission of monetary policy by facilitating greater pass-through of interest on excess reserves (IOER). SBAs are designed to remove credit risk by creating narrow accounts that could allow any bank to compete for money market funds. Because of increased competition, the rates paid on borrowings secured by SBAs, along with other money market rates, would likely be pushed up closer to the IOER rate and would be more tightly linked to that rate. SBAs could promote a more efficient allocation of reserves within the banking sector by shifting reserves from banks with high balance sheet costs to banks with low balance sheet costs. SBAs w