The H.3 statistical release indicates that nonborrowed reserves of
depository institutions have declined substantially since mid-December
to a level that is now negative. This development reflects the
provision of a large volume of reserves through the Term Auction
Facility (TAF) and has no adverse implications for the availability of
reserves to the banking system.
By definition, nonborrowed reserves are equal to total reserves
minus borrowed reserves. Borrowed reserves are equal to credit extended
through the Federal Reserve's regular discount window programs as well
as credit extended through the TAF. To maintain a level of total
reserves consistent with the Federal Open Market Committee's target
federal funds rate, increases in borrowed reserves must generally be
met by a commensurate decrease in nonborrowed reserves, which is
accomplished through a reduction in the Federal Reserve's holdings of
securities and other assets. The negative level of nonborrowed reserves
is an arithmetic result of the fact that TAF borrowings are larger than
total reserves.
