The ex­pan­sion of the Fed­eral Re­serve’s port­fo­lio of Trea­sury debt and mort­gage-backed se­cu­ri­ties has a big­ger im­pact on the credit mar­kets than pay­ing banks in­ter­est on ex­cess re­serves.

National Mortgage News - - Voices - BY CHRISTO­PHER WHALEN

there is a con­sid­er­able de­bate in the world of eco­nom­ics and fi­nance about the ef­fi­cacy of the Fed­eral Re­serve’s pay­ments of “in­ter­est on ex­cess re­serves” held at the cen­tral bank. Nor­bert Michel at the Her­itage Foun­da­tion and Ge­orge Sel­gin at the Cato In­sti­tute, vo­cif­er­ous crit­ics of the prac­tice, claim that the 1% now paid in in­ter­est on ex­cess re­serves (IOER) is con­strain­ing bank lend­ing. In fact, there is noth­ing that sup­ports this the­sis.

Prop­erly viewed, the Fed­eral Re­serve Sys­tem is the al­ter ego of the U.S. Trea­sury. The Fed does not earn “prof­its” from its hold­ings of Trea­sury debt, but sim­ply for­gives part of the obli­ga­tions of the United States, sub­tracts its op­er­at­ing ex­penses, and re­mits the bal­ance back to the Trea­sury.

In 2008, when Congress gave the Fed the power to pay IOER de­posited with the Fed, it was sim­ply cre­at­ing a new short-du­ra­tion, risk-free as­set class. Ex­cess re­serves com­pete with Trea­sury obli­ga­tions and other short-du­ra­tion in­vest­ment as­sets with low or zero risk weight­ing for bank cap­i­tal pur­poses. The 1% that the Fed now pays on IOER is a bit higher than the 0.8% avail­able on T-bills ma­tur­ing in the next four weeks, but does this con­strain bank lend­ing? Ab­so­lutely not.

In the the­o­ret­i­cal realm of eco­nom­ics, the Fed’s 1% pay­ment of IOER may seem sig­nif­i­cant. But, es­pe­cially since it is a true risk-free as­set, the rel­e­vant com­par­i­son for this rate is against other short-term in­vest­ments with sim­i­lar risk pro­files. Ex­cess re­serves on de­posit with the Fed are cash, so if the bank finds a bet­ter use for the funds, there is noth­ing to pre­vent a change in as­set al­lo­ca­tion.

When con­sid­er­ing the as­set-li­a­bil­ity man­age­ment of a bank, there are ba­si­cally three buck­ets: lend­ing, in­vest­ing and trad­ing. The fact that the bank can earn 1% on ex­cess re­serves with the Fed — with a zero cap­i­tal weight — is cer­tainly rel­e­vant to the in­vest­ment func­tion of the in­sti­tu­tion, but the lend­ing side of the house is un­likely to even con­sider it. More im­por­tant to lend­ing are the in­ter­nal ex­po­sure risk lim­its for dif­fer­ent as­set classes, the over­all lever­age of the in­sti­tu­tion ver­sus reg­u­la­tory lim­its, and the net runoff of ex­ist­ing loans.

This is not to say that Fed mon­e­tary pol­icy has no ef­fect on lend­ing. In fact, the vast ex­pan­sion of the Fed’s $4.7 tril­lion port­fo­lio of Trea­sury debt and mort­gage-backed se­cu­ri­ties has a sig­nif­i­cant im­pact, re­sult­ing in a dis­tor­tion of the credit mar­kets. These pur­chases of se­cu­ri­ties by the Fed were funded with ex­cess re­serves es­sen­tially cre­ated by the Fed as part of its rad­i­cal pol­icy of “quan­ti­ta­tive eas­ing,” or QE. The re­sult has been a sharp con­trac­tion in credit spreads that has ef­fec­tively sup­pressed the true cost of credit.

Far from con­strain­ing bank lend­ing, the Fed’s QE has en­cour­aged a great deal of lend­ing and, most im­por­tant, se­cu­ri­ties is­suance to in­fe­rior bor­row­ers at in­vest­ment-grade credit spreads. In­vest­ment grade debt issu- ance is at record lev­els. The fact that the Fed pays banks 1% on IOER bal­ances in re­turn for longer-du­ra­tion Trea­sury debt and even Gin­nie Mae MBS ac­quired via QE is hardly a good trade-off. In­deed, one might well ask why the Fed does not pay banks more than 1% in IOER!

Ul­ti­mately, most of the growth of ex­cess re­serves at the Fed­eral Re­serve is driven more by QE than the rel­a­tive rate paid. When the Fed be­lat­edly de­clares suc­cess and winds down its mas­sive port­fo­lio, credit mar­kets will start to nor­mal­ize and the con­sid­er­able credit risk cre­ated by QE will also start to sub­side, though this process will take many years. Although some view the Fed’s pay­ment of IOER as a sub­sidy to banks and an in­fla­tion­ary threat, others main­tain it keeps in­ter­est rates and in­fla­tion in check.

Christo­pher Whalen is chair­man of Whalen Global Ad­vi­sors.

Prop­erly viewed, the Fed­eral Re­serve Sys­tem is the al­ter ego of the U. S. Trea­sury.



Park­side Lend­ing has ex­panded into New York with the ad­di­tion of Rich Bloom as North­east­ern re­gional man­ager and Katie Plezia and El­iz­a­beth Nichols as se­nior ac­count ex­ec­u­tives.

Bloom has been in the mort­gage busi­ness for 31 years, 24 as a sales man­ager, and will be cov­er­ing the East Coast from Vir­ginia to Maine.

Plezia has over 30 years of mort­gage ex­pe­ri­ence in the New York mar­ket and Nichols has over 20 years of ex­pe­ri­ence as a whole­sale and cor­re­spon­dent ac­count ex­ec­u­tive in down­state New York, spe­cial­iz­ing in jumbo, con­ven­tional, FHA and VA loans.



LBA Ware has hired in­dus­try veteran Finn Kle­mann as direc­tor of busi­ness devel­op­ment.

Prior to join­ing LBA Ware, Kle­mann was vice pres­i­dent of sales for the North­east ter­ri­tory at LoanLog­ics, a mort­gage tech­nolo y and out­sourced ser­vices provider.

He has also held sev­eral high-level sales po­si­tions with - nan­cial ser­vices com­pa­nies such as In­terthinx (now First Amer­i­can Mort­gage Ser­vices), As­cen­dant Cap­i­tal Part­ners, Haver­ford Fi­nan­cial Ser­vices, En­vest­net and Lin­coln Fi­nan­cial Dis­trib­u­tors.



Aries/Con­lon Cap­i­tal said that Fran­cisco Na­corda has joined the rm as se­nior vice pres­i­dent and will lead the bou­tique com­mer­cial mort­gage bank­ing rm’s orig­i­na­tions busi­ness in Or­lando, Fla.

In his new role as SVP, Na­corda will be re­spon­si­ble for ar­rang­ing bridge and per­ma­nent debt on be- half of own­ers of all com­mer­cial prop­erty types na­tion­wide.

He has nearly 25 years of ex­pe­ri­ence in the com­mer­cial real es­tate in­dus­try and prior to join­ing Aries/ Con­lon Cap­i­tal, he served as se­nior ex­ec­u­tive vice pres­i­dent of LD Cap­i­tal for six years, where he sourced, orig­i­nated, un­der­wrote and struc­tured debt and eq­uity for mid-to-large bal­ance com­mer­cial trans­ac­tions.



Wells Fargo Home Lend­ing has named Liz Bryant to lead the com­pany’s re­tail sales or­ga­ni­za­tion.

Bryant has 25 years of ex­pe­ri­ence in mort­gage orig­i­na­tions and op­er­a­tions, and has been with Wells Fargo since 2003, most re­cently serv­ing as head of home lend­ing re­tail ful ll­ment op­er­a­tions.

Prior to join­ing the com­pany as a re­gional sales man­ager, she served with GMAC Mort­gage, where she was re­spon­si­ble for re­tail loan pro­duc­tion and op­er­a­tions in 17 Western states.



The Co­op­er­a­tive Bank, a full- ser­vice com­mu­nity bank spe­cial­iz­ing in com­mer­cial real es­tate and busi­ness lend­ing through­out east­ern Mas­sachusetts, has hired Jim Pic­ciotto as se­nior mort­gage loan orig­i­na­tor.

In this role, he will gen­er­ate quali ied res­i­den­tial mort­gage busi­ness in The Co­op­er­a­tive Bank’s CRA lend­ing area and sur­round­ing com­mu­ni­ties.

Pic­ciotto has al­most 30 years of ex­pe­ri­ence as a mort­gage banker and prior to join­ing The Co­op­er­a­tive Bank he held po­si­tions at United Bank, EverBank and Cam­bridge Mort­gage Group.

Fran­cisco Na­corda

Chicago, IL

Rich Bloom

San Fran­cisco, CA

Liz Bryant

Des Moines, IA

Finn Kle­mann

Ma­con, GA

Jim Pic­ciotto

Roslindale, MA

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