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Proposal for the Fed- start a euro depository account for member banks

Posted by WARREN MOSLER on September 22nd, 2011

The Fed has an account at the ECB.

And while banks can have accounts at the ECB, they are not currently segregated from the bank’s balance sheets.
In other words, if you have a euro deposit with a US bank, and the bank fails, you become a general creditor and could lose all of your euro.

This proposal would work as follows:

The Fed would act as agent for its member banks,
allowing them to open euro accounts at the Fed,
with the Fed keeping those euro in its euro account at the ECB.

These accounts would be segregated from the member bank’s balance sheet, so that any bank insolvencies
would not be a factor with regard to these segregated euro deposits.

The member bank must deposit all of these client euro deposits at the Fed.

Functionally, it would be as if the bank’s euro depositors had direct access to the Fed’s euro account at the ECB.

Therefore there need be no capital requirements associated with these accounts.

These accounts would allow global investors access to ‘risk free’ euro deposits.

Currently they must hold deposits in euro banks, national govt. debt, corporate debt, or actual euro cash.

This will help stabilize the euro financial structure and provide a bit of income from service fees for US member banks.

7 Responses to “Proposal for the Fed- start a euro depository account for member banks”

  1. anarchistas Says:

    In other words, stripe base money out of European banks.

    Reply

    WARREN MOSLER Reply:

    they are getting funded by the ECB in any case, directly or indirectly, but yes, it would redirect some of that channel

    Reply

  2. Mario Says:

    Therefore there need be no capital requirements associated with these accounts.

    b/c this is not lending, it is simply holding deposits. correct?

    Reply

    WARREN MOSLER Reply:

    right

    Reply

  3. Winslow R. Says:

    My only quibble would come from the Fed going ‘fractional’, similar to european banks only having a small fraction of dollar reserves to back up euro dollar deposits or, as currently happening, the fed accruing more euros than are required by U.S. bank depositors. Why? To avoid exchange risk :)

    The fed is currently creating/loaning dollar reserves to the ECB to allow the conversion of financial and real wealth, previously held in Europe, into U.S. dollar reserves to be held in U.S. banks.

    My guess is demand for euro denominated accounts in U.S. banks would be small though they would help offset ‘potentially fiscal’ future fed action. My question, on whether the Fed allows U.S. banks to take euro deposits, was in regards to the fx risk that European banks seem to have.

    Reply

    WARREN MOSLER Reply:

    the fed has no exchange risk currently and wouldn’t with this proposal

    Reply

  4. Winslow R. Says:

    Divestiture from Europe seems to be worldwide. If Europe collapses, then Asia next? Then what?

    EUROPE MARKETSSEPTEMBER 22, 2011
    Europe’s Banks Turn to Asia for Cash

    http://online.wsj.com/article/SB10001424053111904563904576584614156970284.html?KEYWORDS=european+banks

    Reply

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