Commercial bank reserves types
Hi Joseph, thank you for the very high quality content that you provide through this blog, and on Twitter.
I have a question on commercial bank reserves types that I haven't been able to get clarity on. When a commercial bank holds parts of its assets as reserves, this "cash" exists, from my understanding, either as physical cash, Federal Reserve Notes in the bank's vault, or, in a digital form, as a reserve balance at the Federal Reserve.
Are these the only two ways in which commercial bank reserves can exist, or is there a another digital way in which cash can be held by a commercial bank, without being a physical Federal Reserve Note, and without being registered on the bank's reserve balance at the Fed ?
Assuming that the only digital way in which a bank reserve can exist is on a bank's reserve balance at the Fed, if I was to initiate, for example, a simple $10 ACH transaction from a BofA checking account to a Chase checking account, that simple operation would trigger a $10 debit at BofA's Fed reserve account, and a $10 credit at Chase's Fed reserve account.
As this doesn't seem practical in case of high volume, low amount transactions, I imagine there is a sort of "Commercial bank digital USD", a form of digital reserves that commercial banks are free to transfer between each other, and that is digitally convertible into reserves at the Fed at any moment. Actual transfers of reserves at the Fed from one commercial bank to another would only occur for larger transactions.
George Gammon says cash is a liability for the bank. Assets for banks are loans and I would guess treasuries they hold are too.
Your instinct is right that small value payments are different from large value payments, but rather than different types of money there is a different payment system. Small value payments are made using ACH, which batches a bunch of small payments together for settlement periodically. Large value payments are made using Fedwire, which is an instant transfer between banks.