Board of Governors of the Federal Reserve System

Figure 1. Rates and Volumes Borrowed by Domestic Banks in the Fed Funds Market

The figure is a scatter plot showing the relationship between the spread to interest on reserve balances (IOER) and cumulative average lending volume in the fed funds market, separated by lender type. The vertical axis, "Spread to IOER," ranges from approximately −0.4 to 1.0 (basis points). The horizontal axis, "Average cumulative volume (billions)," ranges from 0 to 14.

Each point reflects at least seven domestic banks' trading behavior averaged across the sample from October 2015 to January 2024 (not a single day). Points are distinguished by lender type: black triangles represent volume lent by bank lenders, and red circles represent volume lent by non-bank lenders.

Bank lenders (black triangles): The black triangles form a rising, step-like pattern concentrated in the left portion of the plot, with cumulative volume reaching approximately 2.5–3 billion. Reading from left to right:

• Small volumes (0 to ~0.5 billion) occur at negative spreads, ranging from about −0.4 to −0.25
• Volume increases through spreads of −0.2, −0.1, and approaching zero
• The majority of bank lending volume (roughly 0.5 to 2.5 billion) is concentrated in a nearly flat band at spreads between approximately −0.1 and +0.05
• At the highest cumulative volumes (~2.5–3 billion), spreads rise steeply from about +0.1 through +0.4, +0.6, +0.8, and up to approximately +1.0

Non-bank lenders (red circles): The red circles form a similar step-like pattern but with substantially higher cumulative volumes, reaching approximately 10 billion. Reading from left to right:

• Small volumes (0 to ~1 billion) occur at negative spreads, ranging from about −0.25 to −0.2
• Volume increases through spreads of approximately −0.15 to −0.1
• The vast majority of non-bank lending volume (roughly 1 to 9 billion) is concentrated in a nearly flat band at spreads between approximately −0.1 and 0 (at or just below IOER)
• At the highest cumulative volumes (~9–10 billion), spreads rise steeply, climbing from near zero through +0.1, +0.2, +0.4, +0.5, +0.7, and reaching approximately +0.9

Key takeaway: Non-bank lenders dominate total lending volume in the fed funds market, accounting for roughly three times the cumulative volume of bank lenders. Both lender types show similar patterns: while some lending occurs at negative spreads, the majority of volume is transacted at spreads near zero or slightly below IOER, with only small amounts at significantly positive spreads. This pattern is consistent with lenders responding to different funding costs and opportunity costs of lending in the fed funds market.

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Figure 2. Reserves-to-Deposits Across Domestic Banks

The figure contains two histograms placed side by side, each showing the distribution of domestic banks’ reserves-to-deposits ratios. In both panels the horizontal axis is the reserves-to-deposits ratio, ranging from 0 to 1, and the vertical axis is "Frequency."

Left panel — "Small banks" (banks with less than 10 billion dollars in assets): The distribution is strongly right-skewed (concentrated toward low ratios). Frequency is highest at the far left, with a pronounced spike of about 80 at the lowest ratio (near 0) and many bars in the 35–48 range just above it. Frequency then declines steadily as the ratio increases, falling to roughly 10 or below beyond a ratio of about 0.4, and thinning to only a few observations approaching a ratio of 1. The vertical axis extends to 80.

Right panel — "Medium & Large banks" (banks with greater than 10 billion dollars in assets): The distribution is much flatter and more evenly spread across the range. It peaks at the left with a frequency of about 47 near a ratio of 0, but unlike the small-bank panel it retains substantial mass across the middle and upper ranges — frequencies commonly between about 10 and 30 all the way out to a ratio of 1. The vertical axis extends to 50.

Key takeaway: Small banks’ reserve-to-deposit ratios are heavily skewed toward low values, whereas medium and large banks hold higher and more broadly distributed reserve ratios. This indicates small banks are more likely to be sensitive to deposit outflows and to adjust reserves in response to deposit changes, consistent with the Note’s discussion of size-based differences in liquidity management.

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