US: Bank Reserve Settlement

December 21, 2016 06:00 CST

This is a two-week period that ends every other Wednesday during which commercial banks must meet reserve requirements stipulated by the Federal Reserve.

Sometimes, banks are scrambling to meet their required reserve amount on Wednesday. Traditionally, if banks are having problems meeting reserve requirements, the federal funds rate market will feel the brunt of it since the federal funds rate is the rate which banks charge each other for the use of overnight funds. Usually, small regional banks have more than ample funds, while large money center banks are the ones in need of the funds because they loan their funds more extensively. Most of the time, small regional banks will lend overnight funds to large money center banks. When there is little liquidity in the banking system, the federal funds rate can shoot up sharply on a reserve settlement Wednesday because the money center banks are willing to pay whatever it takes in order that their reserves are meeting the Fed's requirements. Since the Fed engaged in quantitative easing, there has been less volatility in the fed funds rate.