Where do the $940 billion in excess Bank Reserves on the Fed Reserve Balance *** come from?

Here are some explanations I have come across and why they may leave
the vast majority of the $940 billion unexplained.

1) The $940 billion in excess Reserves are substitute for Fed Funds
since the Federal Reserve started paying the equivalent of Fed Funds
rates on such Reserves. But, Fed Funds represents interbank
borrowings. And, such Fed Funds should pretty much net themselves out
on a system wide basis. How would the bank system be sitting on an
excess $940 billion? Supporting this, between April 08 and April 09,
Fed Funds within the banking system decreased only marginally by $30
billion or so (Fed Statistical Release H.8), but bank Reserves at the
Fed increased by about $900 billion (Fed Stat Release H.3 or H.4).

2) The $940 billion in excess Reserves is the result of lackluster
credit demand. But, the credit demand within the banking sector has
held up reasonably well. Fed Stat Release H.4 shows loan portfolios
actually increasing over the past year (H.8).

3) It is TARP funds. But, TARP injected only $250 billion within the
banking system. The bank loan portfolio mentioned above already
confirms the TARP injection of funds has not resulted in much money
creation yet. So, it still leaves it short by nearly $700 billion of
the accumulated bank Reserves at the Fed. Also, why would banks
borrow from the Government at 5% + cost of warrants to reinvest those
funds at only 0.25%?

4) The Economist (British magazine) recently suggested the $940
billion in bank Reserves were a direct result of all the additional
credit support on the asset side of the Federal Reserve balance
***. But, if those innovative credit facilities can be treated like
standard fund injection such as the Fed purchasing Treasuries, why
would the banks reinvest those funds at only 0.25%. When banks do not
reinvest fund injection from the Fed (buying Treasuries) into higher
yielding loans, they reinvest those funds in securities yielding a lot
more than Fed Funds.

The data is also puzzling. The $940 billion in excess Reserves are
readily observable on the Federal Reserve balance *** (H.4) and in
aggregate reserves (H.3). But, they are hard to fit within the
commercial banks balance *** (H.8). Between December 2007 and May
2009, bank Reserves increased on the Fed’s balance *** (liability
side) from $5 billion to $951 billion (H.4). Over the same period
Cash assets (that includes bank Reserves) on the commercial banks
industry-wide balance *** (H.8) increased from $294 billion to
$1,064 billion. While bank Reserves at the Fed increased by $946
billion, Cash assets on the banks balance *** increased by only $770
billion. And, Cash assets also include “vault cash, cash items in
process of collection, balances due from depository institutions…”
Thus, there is at least $176 billion in missing bank Reserves between
the Fed’s balance *** and the Banks’ and potentially a lot more.

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