Moved from comments: Reserves and payments
Great explanations! Thank you. It would really help me if you clarified the payments mechanisms, and specifically the effects on the Fed Reserve Balance sheet.
1. If I pay you $1000, the Fed debits the reserves of my Bank and credits the reserves of your bank. No change in total bank reserves.
2. If you take the $1000 and invest it in a MMF, then the Fed debits the reserves of your Bank and credits the reserves of the bank the MMF uses to clear inflows and outflows. No change in total bank reserves.
3. If the MMF then purchases a t-bill from Schwab brokerage, the Fed debits the MMF bank account and credits Schwab Brokerage’s bank account. Again, no change in total bank reserves.
4. If, instead, the MMF had invested in RRP, the Fed debits the MMF reserve account and credits RRP. This is a decrease of $1000 in bank reserves and an increase of $1000 in RRP. Bank reserves are down, and RRP is up – the composition of the liability side of the Fed’s balance sheet has changed.
5. Similarly, if the MMF buys a t-bill direct from the US Treasury, then the Fed debits the MMF reserve account and credits TGA. Again, bank reserves down and TGA up – the composition of the Fed’s balance sheet has changed.
Have I got these 5 cases right? What is tripping me up is who the Fed credits when money moves from a bank (the debit) to a non-bank entity such as a MMF or Brokerage firm? I am assuming both entities, and other non-bank entities, all have bank accounts that get the credit. So it is only if the credit goes to RRP or TGA that bank reserves in aggregate decrease? Thank you for any clarity – sorry for the long entry
Money moves through transactions between banks. So when a bank sends money to a non-bank, the bank sends reserves to the non-bank's bank, who in turn credits the non-bank's deposit account. So if Bank A sends $100 to a non-bank, then non-bank's bank receives $100 in reserves and balances it with a $100 deposit liability to the non-bank.
Reserves can leave the banking system when money is sent to a non-bank with a Fed account. So if anyone sends money to the Treasury (TGA Account), Fannie/Freddie (GSE accounts), clearing house (DFMU account)s etc then that means the banking system has fewer reserves.
Payments do the RRP also reduce reserves by changing the composition of the Fed's liabilities. Instead of owing reserves, Fed now owes a repo loan.
Yes that's right. NewBank would have a Fed account now and be able to hold reserves. The investor would send money to NewBank in exchange for equity. Investor's bank would settle the payment to NewBank with reserves, which end up in NewBank's Fed account