DR. PAUL DELIVERS HOLDS A HEARING TITLED THE FED'S BIG BANK WELFARE PROGRAM: OVERSIGHT OF THE FED'S IORB REGIME

The following information was released by the U.S. Senate Committee on Homeland Security and Governmental Affairs:

Today, U.S. Senator Rand Paul (R-KY), Chairman of the Senate Homeland Security and Governmental Affairs Committee, convened a hearing to discuss a newreportexposing the Federal Reserve's use of Interest on Reserve Balances (IORB).

The report is based on over40,000 pagesof documents Chairman Paul obtained from the Federal Reservedetailing IORB payments for every two-week period from July 2013 through July 2025.

In his opening statement, Chairman Paul described the Federal Reserve as one of the "most powerful, secretive, and unaccountable institutions in U.S. history." He noted that even Forbes ranked Federal Reserve Chairman Jerome Powell as the 11th most powerful person in the world, outranking the heads of government in France and the United Kingdom.

He further explained how the Fed's move to an "abundant reserves" system after the 2008 financial crisis dramatically expanded its balance sheet and drove up the cost of managing interest rates. Chaiman Paul noted that the Fed has made about $607 billion in IORB payments since 2013, including $186 billion in 2024 alone, and that both U.S. and foreign banks have benefited. Chairman Paul said the purpose of releasing this data is to bring long-overdue transparency to the Fed's operations and to get the ball rolling on finally auditing the Federal Reserve.

The hearing featured testimony from several leading experts on monetary policy and financial markets:

Dr. Norbert J. Michel, Vice President and Director of the Cato Institute's Center for Monetary and Financial Alternatives, discussed the structure of the Federal Reserve's operating framework:

"The goal should be to reduce the Fed's holdings to no more than the pre-2008 share of the commercial banking sector" said Dr. Michel. "Congress should also limit the size of the Fed's balance sheet by, for example, capping the Fed's total assets at no more than 10 percent of the commercial banking sector's total assets, the approximate share held by the Fed prior to the 2008 financial crisis."

Ryan Young, Senior Economist at the Competitive Enterprise Institute, provided insight into how IORB influences market behavior and competition:

"The two IORB problems I wish to highlight today are cronyism and inflation. First, cronyism. The Committee's report points out that, in 2024, the Fed paid about $180 billion in IORB to banks. While this number is likely to drop in 2025 and 2026 due to lower interest rates, it is still a bad look for the Fed," said Young. "The second IORB problem I wish to discuss is inflation. IORB raises inflation risk in two ways: First by potentially influencing the Fed's federal funds rate decisions, and second by influencing its open market operations policies."

Brian S. Wesbury, Chief Economist at First Trust Advisors, offered perspective on how the Fed's interest-rate decisions affect broader economic conditions:

"Government programs, once started, create new behaviors and alter the make-up of markets," said Wesbury. "Throughout history, governments have resisted reversing course because it might be disruptive. . . In other words, now that this system is in place, we can't change it. This is a woefully inadequate argument. Just because unwinding something is difficult does not mean it should not be unwound. In addition, it is not clear at all that the banking system really is more resilient. Certainly, both the Fed and overall government are larger than they would have been without these changes in the policy regime at the Fed."

View the Chairman's opening statementhere.

Chairman Paul's Opening remarks as prepared below:

The Federal Reserve is one of the most powerful, secretive, and unaccountable institutions in U.S. history. Its insulation from oversight, combined with its massive coffers and strong statutory authorities, makes it a uniquely troubling institution.

To give you an idea of just how powerful the Fed is, in 2018, Forbes ranked Jerome Powell, the Chairman of the Federal Reserve Board of Governors, as the 11th most powerful person in the world, ahead of the prime ministers of France and the United Kingdom.

Earnest oversight is long overdue. Current law prohibits the Government Accountability Office from auditing the Fed's vast monetary policy functions, and the Fed's Inspector General serves at the pleasure of the Fed Board of Governors, the very institution it's supposed to hold accountable.

This summer, I began investigating the Fed. After months of stonewalling, the Fed finally produced information on one of the most significant tools of monetary policy Interest on Reserve Balances, or IORB.

The Interest on Reserve Balances system began after the 2008 Financial Crisis, when the Fed aggressively purchased assets to flood the market with liquidity. This marked the beginning of a transition from the scarce reserves regime to the abundant reserves regime.

The Fed vastly underestimated how this transition would play out. Initial estimates put the cost of transitioning at $35 billion. As of May 2022, those estimates increased to $2.3 trillion.

Under this new regime of abundant reserves, banks would receive interest payments, known as Interest on Reserve Balances, on deposits held in accounts at the Fed.

When interest rates are low and the Fed's balance sheet is small, this is a manageable regime. Unfortunately, since 2008, both the size of the balance sheet and interest rates have increased the cost of this regime to unsustainable levels.

Take the size of the Fed's balance sheet. Before 2008, it was approximately 5% of GDP. After the Great Financial Crisis, it rose steadily, reaching approximately 18%. During the COVID-19 pandemic, it soared to a record high of 35% in 2022. It has fallen since then to approximately 21% today but remains well above historic levels.

When interest rates were near zero from 2010 to 2016, the Fed had to pay little in the form of Interest on Reserve Balances. But when inflation concerns required the Fed to raise interest rates from 2016 to 2019 and 2022 to 2023, the Interest on Reserve Balances rate was the primary tool to do so, requiring the Fed to increase the amounts it was paying to banks to get them to hold money at the Fed.

This led to distortions in Federal Funds markets, including periods where short term Treasury yields were actually below the Interest on Reserve Balances rate. When this happens, the Fed loses money, and taxpayers underwrite the losses.

The Fed is supposed to send its profits to the Treasury. The Interest on Reserve Balances system, however, has led to two years of operating losses. The Fed is taking funds that would otherwise go to the taxpayer, and using them to make Interest on Reserve Balances payments to the largest banks in the world, both foreign and domestic.

It's a double whammy for the taxpayer. Banks use your money that's sitting in a checking account to earn up to 5.4% interest from the Fed, the payment of which is underwritten by your tax dollars, then pay you an average of 0.07% interest on checking accounts and pocket the difference. Interest on Reserve Balances enables the Fed, without any form of oversight or elections, to unilaterally transfer wealth from the American taxpayer to the biggest banks on Wall Street.

Interest on Reserve Balances payments have totaled hundreds of billions of dollars, and most people don't even know they exist. Since 2013, the Fed has paid $607 billion to both foreign and domestic banking institutions. In 2024 alone, the payments amounted to $186 billion, or about 10 percent of the Fiscal Year 2024 deficit. The secrecy surrounding the amounts of these payments have allowed unelected officials at the Fed to influence the American economy in ways that rival elected Members of Congress.

For the first time ever, the report I released this week revealed the true nature of these payments.

The data I obtained from the Fed shows that the largest banks in the country made a windfall. Big names like JP Morgan Chase, Bank of America, Citi, Wells Fargo, and U.S. Bank raked in tens of billions of dollars from holding your money in Fed accounts. From 2013 to 2024, Interest on Reserve Balances payments to those top five banks amounted to $136 billion, which equates to 12 percent of profits for these banks over the same period.

Money wasn't just flowing to Wall Street. Foreign banks also cashed in. 11 of the top 20 recipients of Interest on Reserve Balances payments from 2013 to present were foreign banks. These funds aren't exclusive to allied nations. Chinese banks alone received about $10 billion in Interest on Reserve Balances payments.

Oversight of the Fed's Interest on Reserve Balances payments is the first step in finally Auditing the Fed, but there is still much more work left. My "End the Fed's Big Bank Bailout Act" would end the forcible transfer of wealth from average Americans to Wall Street institutions under the guise of Interest on Reserve Balances payments, while my "Federal Reserve Transparency Act" would allow meaningful oversight of all functions of the Fed, which is long overdue. If the Fed handed over this data, what is hiding in the information they still refuse to release?