Banks are unique among financial institutions because they are the
cheapest source of liquidity in the economy. Banks choose to hold reserves
to facilitate settlement of end-of-day net due to positions arising from
payments operations. Money market substitutes for bank liabilities do not
escape from the cost of reserves since their issuers lean on banks to
provide liquidity. Since the cost of reserves falls on all issuers of less
liquid liabilities seeking access to payment services, including non-bank
intermediaries, reserves cannot represent a tax on the banking system alone.
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