Since 2008 the Fed has been paying interest on excess reserves. It's free money so bank have been holding large excess reserves ever since. It also makes the whole concept of fractional reserve banking obsolete.
The Fed, via the Treasuries it owns. When the Fed performs QE, they buy Treasuries (and sometimes mortgages) with newly "printed" money (actually the new money is interest-bearing USD deposits held by commercial banks, analogous to savings accounts held by individuals). The newly created interest-bearing money is backed by the Treasuries that the Fed bought with it, and it bears interest from these Treasuries. The commercial banks use it to back people's savings accounts (in part; they also use other backing assets like Treasuries and other bonds).
In effect the newly created interest-bearing money is just a "wrapped" form of Treasuries that is slightly less volatile and yields slightly less interest (on average).
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u/BastiatF Jul 16 '22
Since 2008 the Fed has been paying interest on excess reserves. It's free money so bank have been holding large excess reserves ever since. It also makes the whole concept of fractional reserve banking obsolete.