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The payment system benefits of high reserve balances

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The policy measures since the financial crisis have greatly expanded the size of the Federal Reserve’s balance sheet, and have thus also raised the level of aggregate bank reserves. Over the same time period there has been a significant shift in the timing of payments over the Federal Reserve’s Fedwire Funds service toward earlier settlement. This paper documents this timing change and presents regression results that suggest that the increase in overall reserve balances explains the vast majority of this development. This paper also discusses the benefits of high aggregate reserve balances for the robustness of the payment system and its potential implications for policy going forward.

Keywords: Federal Reserve; Fedwire; government policy; reserves; risk; settlement liquidity

Document Type: Research Article

Publication date: March 1, 2016

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  • Journal of Payments Strategy & Systems publishes peer-reviewed articles and case studies analysing best practice, emerging issues and new thinking in how to develop a profitable, customer-focused payments strategy. It examines major issues facing the corporate, wholesale and retail payments industry from a business, risk and operational perspective.

    Edited by renowned payments expert Alec Nacamuli and guided by an eminent Editorial Board, each quarterly 100-page issue provides practical, detailed analysis of developments and trends in the payments business, regulation, new entrants and technologies and how to bring them all together to define your payments strategy, as well as actionable advice and ‘lessons learned’ from fellow professionals on how payment processing systems can be leveraged to maximise profitability, security and efficiency and minimise risk. It contains no advertising and no advertorial.

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