The Weekend Eurodollar Game



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    • This paper originally was written while on leave to the Board of Governors of the Federal Reserve. I am more than usually indebted to Allen B. Frankel and Thomas D. Simpson for the many hours of discussion which helped shape and form the analysis in this paper. I also benefited from discussions with Darwin Beck, Sterie Beza, David Lindsey, and Perry Quick. Microbank data were provided by the Board of Governors of the Federal Reserve and research assistance by Jim Brackett, Mary McLaughlin, and Jack Walton. The views expressed here are those of the author and are not necessarily shared by either the Board or the International Monetary Fund where he is a Senior Economist in the Central Banking Department


A growing number of large U.S. banks have used artificial Eurodollar transactions in connection with the heavier weighting of Fridays in the calculation of required reserves to significantly reduce the impact on them of that requirement. This reserve avoidance behavior bestows an unintended and inequitable benefit on those banks engaging in it, unnecessarily increases risks from credit exposures and potentially distorts money stock measures. The incentive for this activity and hence its practice can best be removed by paying interest on required reserves or weighting Fridays equally with all other business days in the reserve requirement calculations.