Fed to Conduct Series of Term Deposit Tests Next Month
The Federal Reserve said it plans a series of fixed-rate offerings of term deposits for banks beginning in October as it tests a facility designed to help it eventually raise interest rates.
The term deposits announced today will allow banks to withdraw funds early subject to a penalty, the Fed said. That means they would count as high-quality liquid assets banks are required to maintain to weather a financial crisis.
...The early withdrawal feature for term deposits would make the facility more attractive to banks, according to Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.
“Large banks would be able to treat the TDF as overnight cash in their LCR calculations, which would make them much more willing to participate,” he said in an e-mail, referring to liquidity coverage ratio, a measure of a bank’s access to cash and assets that can be quickly converted to cash. That would make it easier for the Fed “to immobilize a larger amount of reserves in ordinary circumstances,” Crandall said.