119-S-2113 Investigative Journalist Impact Analysis

Document 119-S-2113: What the bill does

S.2113 (“End the Fed’s Big Bank Bailout Act”) would amend Section 19(b) of the Federal Reserve Act to prohibit any Federal Reserve Bank from paying earnings on balances maintained by or on behalf of a depository institution—i.e., to eliminate interest on reserve balances (IORB). [1]Congress.gov — Text - S.2113 (119th Congress): End the Fed’s Big Bank Bailout A…

Summary

• Economic transmission: Eliminating IORB removes the primary floor under overnight rates in the Federal Reserve’s ample‑reserves framework, risking loss of policy‑rate control until reserves are drained substantially. The Fed itself warns this could require large, rapid asset sales with upward pressure on the entire yield curve. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…[3]Federal Reserve Bank of New York — Monetary Policy Implementation (Operating in…
• Distributional effects: Banks would forgo tens of billions of dollars in annual IORB income (the Fed paid ~$177B on reserves in 2023 when rates were high), while cash is likely to migrate further to money market funds (MMFs). [4]Reuters — Fed posts record loss of $114.3 billion in 2023; interest paid on res…[5]Office of Financial Research (U.S. Treasury) — U.S. Money Market Funds Reach $6…
• Fiscal claim check: The Fed argues eliminating IORB would not reliably “save taxpayers,” because interest would instead be paid on Treasuries if banks replaced reserves with government securities; moreover, regaining rate control could necessitate sales that raise borrowing costs. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…
• Systemic risk trade‑offs: A non‑remunerated, scarce‑reserves regime could reduce banks’ reserve cushions and increase reliance on nonbank funding, heightening run and plumbing risks (especially during stress) unless offset by intensive daily operations. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…[3]Federal Reserve Bank of New York — Monetary Policy Implementation (Operating in…
• Bottom line: Near‑term disruption risks are material; long‑term outcomes hinge on whether a stable corridor can operate without reserve remuneration—a stance at odds with current U.S. practice, though some research and commentators favor moving away from a floor system. [3]Federal Reserve Bank of New York — Monetary Policy Implementation (Operating in…[6]Bank for International Settlements — BIS Working Paper: Getting up from the flo…

Key metrics

Notes: Interest paid figures from audited 2023 results; deferred asset is cumulative negative income to be offset before remittances resume; MMF assets from OFR; reserve requirement change per Fed. [4]Reuters — Fed posts record loss of $114.3 billion in 2023; interest paid on res…[7]Federal Reserve Board — Federal Reserve Board releases annual audited financial…[5]Office of Financial Research (U.S. Treasury) — U.S. Money Market Funds Reach $6…[8]Federal Reserve Board — Reserve Requirements—Board reduced reserve ratios to 0%…

Economic Effects

Effects on monetary policy implementation, markets, and financial intermediation.

1. Monetary policy implementation risk: Without IORB, the administered‑rate floor under overnight funding markets disappears. The Fed anticipates the effective funds rate would plunge and rate control would be lost until reserves are made scarce via sizable balance‑sheet reductions. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…
2. Balance‑sheet actions and yields: To restore control quickly, the Fed indicates it would need to sell “vast quantities” of Treasuries and MBS, straining market functioning and putting upward pressure across the yield curve—raising borrowing costs for Treasury, firms, and households. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…
3. Bank earnings and capital planning: Banks would lose IORB income that scaled to ~$177B in 2023 at peak rates; removal would compress net interest income and could prompt repricing of deposits/credit or cost‑cutting, with heterogeneity across institutions. [4]Reuters — Fed posts record loss of $114.3 billion in 2023; interest paid on res…
4. Funding composition and credit supply: Higher relative yields in MMFs and T‑bills already attracted large inflows; research shows deposit–MMF substitution strengthens when MMF yields exceed deposit rates. Eliminating IORB likely intensifies this competition, raising bank funding costs and potentially tightening credit. [5]Office of Financial Research (U.S. Treasury) — U.S. Money Market Funds Reach $6…[9]Federal Reserve Board (FEDS Notes) — What Drives the Substitution Between Bank…
5. Who holds reserves: U.S. banks hold the majority of reserves, with domestic banks averaging ~57% and U.S. branches of foreign banks ~38% since 2013; thus income and balance‑sheet impacts would be concentrated among these groups. [10]Federal Reserve Bank of New York — Reserves and Where to Find Them (Liberty Str…
6. Operational regime change: The New York Fed emphasizes that the current ample‑reserves framework relies on IORB (and ON RRP) to anchor rates; removing IORB would force a return toward a scarce‑reserves/corridor approach requiring active, daily reserve management. [3]Federal Reserve Bank of New York — Monetary Policy Implementation (Operating in…
7. Treasury remittances and “taxpayer savings”: The Fed states that over time interest earned on its securities normally exceeds IORB paid, and that forbidding IORB would not inherently save taxpayers; instead, banks would hold interest‑bearing Treasuries or the Fed would sell assets, affecting public borrowing costs. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…
8. Liquidity regulation interaction: Under the LCR, central bank reserves and Treasuries are Level‑1 HQLA; prohibiting IORB would tilt bank liquidity preferences toward Treasuries while shrinking reserve buffers, with uncertain effects on intraday payment liquidity. [11]Federal Reserve/FDIC/OCC — Federal banking regulators finalize Liquidity Covera…

Social Effects

Implications for borrowers, communities, and vulnerable groups.

• Households and small businesses: If rapid Fed asset sales raise the yield curve temporarily, mortgage and small‑business borrowing rates could rise in the transition, increasing debt‑service burdens, particularly for rate‑sensitive borrowers. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…
• Community and smaller banks: Tighter competition for deposits against MMFs could raise funding costs and pressure loan growth at smaller institutions already facing cyclical headwinds, though effects would vary by franchise strength and geography. [9]Federal Reserve Board (FEDS Notes) — What Drives the Substitution Between Bank…[12]Web search · turn 9 #2
• Public finances: Near‑term fiscal optics may improve if Fed losses abate, but the Fed’s own guidance implies taxpayer savings are ambiguous once Treasury financing costs and remittance timing are considered. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…

Environmental Effects

• Direct environmental impacts: None identified; the proposal targets monetary plumbing, not resource use or emissions.
• Indirect effects: Any environmental impact would be second‑order—via changes in public borrowing costs or credit conditions for green investment—and cannot be reliably signed ex ante.

Temporal Analysis

Short‑term versus long‑term consequences.

1. 0–12 months after enactment: High risk of losing policy‑rate control and elevated money‑market volatility until reserves are drained; potential Treasury/MBS sales pressure and higher near‑term yields; accelerated flows to MMFs. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…[5]Office of Financial Research (U.S. Treasury) — U.S. Money Market Funds Reach $6…
2. 1–3 years: Transition to a scarce‑reserves/corridor‑style regime would require active reserve management and greater day‑to‑day operations to stabilize rates; banks may substitute Treasuries for reserves to meet LCR, reducing reserve cushions. [3]Federal Reserve Bank of New York — Monetary Policy Implementation (Operating in…[11]Federal Reserve/FDIC/OCC — Federal banking regulators finalize Liquidity Covera…
3. 3+ years: If a stable corridor is established, steady‑state outcomes depend on tool design; mainstream practice presumes some remuneration of reserves, while BIS research argues a corridor can be preferable if well‑designed—highlighting policy uncertainty around a zero‑interest prohibition. [3]Federal Reserve Bank of New York — Monetary Policy Implementation (Operating in…[6]Bank for International Settlements — BIS Working Paper: Getting up from the flo…

Unintended Consequences

Risks or secondary effects documented by credible sources.

• Deposit disintermediation: Stronger shifts from deposits to MMFs when relative yields favor MMFs, altering bank funding mix and potentially tightening credit supply. [9]Federal Reserve Board (FEDS Notes) — What Drives the Substitution Between Bank…
• Lower reserve cushions: Banks may operate with minimal reserves, increasing sensitivity to payment frictions and raising the odds of funding stress episodes, particularly when nonbank cash lenders signal scarcity. [3]Federal Reserve Bank of New York — Monetary Policy Implementation (Operating in…[13]Federal Reserve Board (FEDS Notes) — Monitoring Reserve Scarcity Through Nonban…
• Shadow‑bank amplification: Larger MMF footprint preserves structural run vulnerabilities identified by OFR/FSOC, transferring liquidity risks outside the safety‑net perimeter. [12]Web search · turn 9 #2
• International spillovers: U.S. branches of foreign banks hold a sizable share of reserves; abrupt regime change could propagate through cross‑border dollar funding markets. [10]Federal Reserve Bank of New York — Reserves and Where to Find Them (Liberty Str…
• Policy debate context: Some analysts and BIS research criticize the floor system’s footprint and politics, favoring a corridor; however, those proposals typically retain some reserve remuneration—distinct from an outright prohibition. [6]Bank for International Settlements — BIS Working Paper: Getting up from the flo…[14]Cato Institute — Cato Journal: The Fed’s New Operating Framework—How We Got Her…

Assessment

Overall stance: Unfavorable (analytical). The weight of official implementation evidence indicates high near‑term disruption risks to rate control and market functioning, ambiguous fiscal benefits, and plausible tightening of bank‑based intermediation. While serious critiques of the floor framework exist, they generally envision a corridor with some remuneration—not a prohibition—suggesting S.2113 overshoots the operational changes needed to achieve those critiques’ aims. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…[3]Federal Reserve Bank of New York — Monetary Policy Implementation (Operating in…[4]Reuters — Fed posts record loss of $114.3 billion in 2023; interest paid on res…[6]Bank for International Settlements — BIS Working Paper: Getting up from the flo…

Sourcing and cross‑checks

Key sources used and how they inform the analysis.

• Bill text and status: Congress.gov official text and actions. [1]Congress.gov — Text - S.2113 (119th Congress): End the Fed’s Big Bank Bailout A…
• Monetary framework and IORB role: Federal Reserve FAQs and New York Fed implementation materials. [2]Federal Reserve Board — Federal Reserve Board—Interest on Reserve Balances (IOR…[3]Federal Reserve Bank of New York — Monetary Policy Implementation (Operating in…
• Size of IORB payments and Fed losses: Reuters coverage of audited 2023 results; Fed audited statements press release. [4]Reuters — Fed posts record loss of $114.3 billion in 2023; interest paid on res…[7]Federal Reserve Board — Federal Reserve Board releases annual audited financial…
• Cash migration to MMFs and substitution with deposits: OFR MMF data; FEDS Notes on deposit–MMF substitution. [5]Office of Financial Research (U.S. Treasury) — U.S. Money Market Funds Reach $6…[9]Federal Reserve Board (FEDS Notes) — What Drives the Substitution Between Bank…
• Reserve holders mix and scarcity signals: NY Fed Liberty Street Economics on who holds reserves; FEDS Notes on nonbank lenders as scarcity indicators. [10]Federal Reserve Bank of New York — Reserves and Where to Find Them (Liberty Str…[13]Federal Reserve Board (FEDS Notes) — Monitoring Reserve Scarcity Through Nonban…
• Liquidity regulation context: 2014 interagency LCR final rule. [11]Federal Reserve/FDIC/OCC — Federal banking regulators finalize Liquidity Covera…
• Alternative viewpoints: BIS Working Paper on moving off the floor; Cato analysis advocating corridors over floors (with reserve remuneration below target). [6]Bank for International Settlements — BIS Working Paper: Getting up from the flo…[14]Cato Institute — Cato Journal: The Fed’s New Operating Framework—How We Got Her…