The Bank for International Settlements (BIS) published its latest "March 2014 Quarterly Review", which features a piece entitled, "Non-US banks' claims on the Federal Reserve." It summary says, "Non-US banks' affiliates in the United States took up about half of the claims on the Fed that it created to pay for its large-scale bond purchases. They did so largely through uninsured branches unaffected by a new FDIC charge on wholesale funding payable by US-chartered banks. Robert McCauley and Patrick McGuire (BIS) find that these branches raised dollars from their affiliates abroad in order to deposit these funds at the Fed. On a consolidated basis, non-US banks raised dollars by swapping other currencies for dollars and increasing dollar liabilities. At the same time, they continued to increase their dollar claims outside the United States." Later, the paper adds, "The Federal Reserve is experimenting with a new operational tool -- the reverse repo -- that could substantially reduce banks' $2.5 trillion (and rising) claims on the Fed, even as the Fed continues to hold its bond portfolio. In a reverse repo, the Fed borrows overnight from a cash-rich counterparty like a money market mutual fund against the security of a bond from the Fed's portfolio, which reached $4.1 trillion on 19 February 2014. From an aggregate perspective, these operations would necessarily drain banks' holdings of balances at the Fed, in particular those in addition to those needed to meet reserve requirements ("excess reserves"). For some banks, especially US branches of non-US banks, it would reduce any profit to be made by taking in wholesale funds at 10 basis points (or less) and holding reserves at the Fed at 25 basis points. In effect, the new operations disintermediate the banks that have done this low-risk trade."
