Clearing Balances
A depository institution that does not have a reserve balance requirement or that passes its reserve balances through a correspondent may wish to use Federal Reserve services. If so, it may establish an account at its Federal Reserve Bank for clearing purposes. A depository institution with a reserve balance requirement that has an account at a Federal Reserve Bank may wish to hold balances above its requirement to facilitate its clearing needs. In all of these cases, the Federal Reserve encourages the depository institution to establish a clearing balance requirement.
A clearing balance requirement is an amount that an institution may contract to maintain with a Reserve Bank in addition to any reserve balance requirement. End-of-day balances held to meet a clearing balance requirement (up to a specified maximum amount) generate earnings credits that may be used to offset charges resulting from the institution’s use of eligible Federal Reserve services. A Reserve Bank may impose a clearing balance requirement if an institution has a history of frequent daylight or overnight overdrafts. An institution is eligible to establish a clearing balance requirement if it is a depository institution (as defined in the Federal Reserve Act), a U.S. agency or branch of a foreign bank, an Edge or Agreement corporation, or an entity with access to Federal Reserve services
Contractual Clearing Balances
Clearing Balance Requirement
- A clearing balance requirement is an amount that an institution may contract to maintain with a Reserve Bank in addition to a reserve balance requirement, if any.
- The minimum clearing balance requirement is $25,000.
- A clearing balance requirement is implemented on the first day of a reserve maintenance period. An institution may modify its clearing balance requirement as often as each maintenance period by completing the Clearing Balance Request form.
- End-of-day balances held to satisfy a clearing balance requirement are averaged over a seven- or fourteen-day maintenance period depending upon the frequency with which an institution reports its FR 2900.
- The clearing balances held by an institution generate earnings credits, which may be used to offset the cost of eligible Federal Reserve services. Earning credits are applied to an institution’s monthly billing service charges.
Clearing Balance Band
- An institution has some flexibility in meeting their clearing balance requirement.
- An institution only needs to hold an average end-of-day clearing balance for a maintenance period that falls within a range around its established clearing balance requirement.
- The range is called the clearing balance band. The top of the band is equal to the clearing balance requirement plus the clearing balance allowance. The bottom of the band is equal to the clearing balance requirement less the clearing balance allowance.
- The clearing balance allowance is equal to the greater of $25,000 or 2 percent of the institution’s clearing balance requirement.
- For example, an institution with a clearing balance requirement of $25,000 has a clearing balance band ranging from zero to $50,000. If an institution’s clearing balance is within this range, the institution earns earnings credits and will not be considered deficient. If an institution’s clearing balance is less than the clearing balance band, the institution is considered deficient. Likewise, if an institution’s clearing balance is greater than the clearing balance band, the institution is in excess of its clearing balance requirement and will not earn earnings credits.
Earnings Credits
- The formula for calculating earnings credits may be found in Chapter VIII of the Reserve Maintenance Manual.
- Earnings credits may only be used to offset charges for Federal Reserve services and are applied to service charges two weeks after they are earned.
- An earnings credit calculator is available on the Federal Reserve Financial Services website Please note that the text on this site will be updated to reflect the use of the Clearing Balance Request Form.
Under the Monetary Control Act, the Federal Reserve Board of Governors applies Regulation D, Reserve Requirements of Depository Institutions, to all depository institutions. Regulation D defines depository institutions that are subject to reserve requirements, the liabilities that are reservable, and the associated reporting, reserve calculation and maintenance requirements. Please visit the Reporting and Reserves website to learn more about clearing balances.