The Fed Versus the Narrow Bank

If you are a bank, and you have extra money, you can park it at the Federal Reserve. It will be perfectly safe there: Accounts at the Fed are money, so there is absolutely no way for the Fed to lose your money.1 Also it will earn interest. The interest rate right now is 2.4 percent.

If you are not a bank, and you have extra money, you cannot do this: Only banks can park their extra money at the Fed. In fact, if you are a large institutional cash investor—a money-market fund, a foreign central bank, things like that—then in some sense you have no way to keep your money perfectly safe. You have no way to just put money in an account that is money, that in all possible states of the world will be usable as money. You can get pretty close. The closest that big non-banks normally get is “overnight general collateral repo”: You give your money to a bank, and the bank gives you back a Treasury security as collateral, and you can get your money back the next day. Also you get interest. The interest right now is pretty close to 2.4 percent; here are three Fed-calculated rates based on overnight repo, which ranged from 2.36 to 2.38 percent yesterday. Meanwhile of course the bank is using your money to run its business. The bank is levered; it uses the money that it gets from repoing Treasuries to go buy other stuff, to trade stocks and bonds and derivatives and so forth.