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Federal Home Loan Banks also hold reserves, but are not eligible to earn IOER, so they lend the cash into the fed funds market at a rate below IOER. U.S. branches of foreign banks, who are eligible to earn IOER, borrow from the FHLBs and deposit the proceeds in their accounts at the Fed, earning the spread. U.S. banks don't participate in this arbitrage ...

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