Excess reserves at the Fed have been going down as the Fed started to unwind its balance sheet (blue line). But oddly, deposits minus loans at commercial banks were steady flat (red line). Why is this?
Moreover, this means that there are a lot of deposits but not enough loans. Taking into account that the yield curve is approaching zero (green line), banks need to pay the same interest to depositors (short term maturity) as they receive in loan interest (higher maturity), but this needs to be done on more depositors than loans.
Which means bank profits will be going down while the Fed reduces its balance sheet and its excess reserves. Less excess reserves also means less money being paid by the Fed to the banks via IOER.
When the blue line approaches zero and the red line doesn't, something magical will happen.
Moreover, this means that there are a lot of deposits but not enough loans. Taking into account that the yield curve is approaching zero (green line), banks need to pay the same interest to depositors (short term maturity) as they receive in loan interest (higher maturity), but this needs to be done on more depositors than loans.
Which means bank profits will be going down while the Fed reduces its balance sheet and its excess reserves. Less excess reserves also means less money being paid by the Fed to the banks via IOER.
When the blue line approaches zero and the red line doesn't, something magical will happen.
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