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Banks Now Interested in Buying Certificates Of Deposit

Posted by: RateAPY Bank Rates News
February 10th, 2010

Federal Reserve Chairman Ben Bernanke was supposed to testify to Congress today about how the Fed was preparing to unwind the extraordinary measures taken to save the world economy. Due to inclement weather in the East, the Chairman did not testify, but he did release a text of his testimony this morning.

One interesting idea the Fed is working on is allowing banks to buy something like certificates of deposit with their reserves through the Federal Reserve. The purpose of the banks converting their reserves to term deposits, similar to the certificates of deposit offered to banking customers, is to drain the financial system of excess liquidity. This term deposit facility idea, along with an idea called reverse repos, would together “allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so.”