Hoisted from the Archives: Is Liquidity Enough? https://www.project-syndicate.org/commentary/is-liquidity-enough: Every week more liquidity is injected into the global banking system by the United States Federal Reserve and the European Central Bank. The average interest rate paid for overnight reserves in the US has been well below the 5.25% per year that the Fed still publicly says is its target.
But the market for overnight reserves now appears to be divided into three segments. Banks known to be healthy can borrow at much less than 5.25%. But banks facing possible liquidity problems–which the Fed wants to be able to borrow at 5.25%–are borrowing from the Fed itself at 5.75%, and so are are a few big banks that want more liquidity but don’t believe they could get it without disrupting the market. Such a difference in the prices charged to regulated banks in financial markets is a sign of a potential breakdown.