At Any Rate US Rates: IORB, WFC, SLR, Oh My!
Jun 10, 2025
Experts dive into the evolving landscape of U.S. rates markets, highlighting the recent elimination of interest on reserve balances and its potential cost-saving implications. They dissect Wells Fargo's lifted asset cap, speculating on its impact on trading strategies and market dynamics. The discussion also considers the Federal Reserve’s strategies for short-term interest rate management, contrasting current practices with historical methods. Additionally, insights on forthcoming reforms to the supplementary leverage ratio are explored, shedding light on the future of banking capital requirements.
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Origin of IORB
- Interest on reserve balances (IORB) started in 2008 to help the Fed manage monetary policy during crises.
- It discourages banks from reserve avoidance and stabilizes financial markets by setting a floor on money market rates.
Impacts of Eliminating IORB
- Eliminating IORB could save the government nearly $1 trillion in interest over 10 years.
- However, it risks lower short-term rates and increased reliance on Fed facilities, potentially disrupting money market stability.
Floor vs Corridor Monetary Systems
- The current monetary policy uses a "floor system" relying on IORB and overnight RRP rates as floors.
- Eliminating IORB means reverting to a "corridor system," which is unlikely and would lead to a smaller Fed balance sheet and higher term premiums.