Banks Have Too Much Money Now

Here’s a thing you could do as a bank. You could take deposits: People and companies give you money, and you promise to give it back when they ask for it. Then you take those deposits and park them as “reserves” at the Federal Reserve. Reserves are just the electronic version of money; your reserves at the Fed are just dollars. This is not the classic banking business of maturity transformation and risk diversification and borrowing short to lend long; this is just people give you money and you hold on to it for them. In a pre-electronic age, this would be just people handing you cash and you keeping it in the vault.

How risky is this model? I mean in practice you could find some ways to mess it up—you could lose the cash in the vault, or your treasurer could steal the money at the Fed—but in the abstract, as a model, it is totally safe. There is no credit risk (you are taking the credit of the Fed, which prints the money), no duration risk, no interest-rate risk, no market risk. You are just storing people’s dollars for them.