Interest on Reserves

Payment of Interest on Balances Maintained to Satisfy Reserve Balance Requirements and on Excess Balances

In October 2008, the Federal Reserve Banks began paying interest on balances maintained to satisfy reserve balance requirements and on excess balances.  A balance maintained to satisfy a reserve balance requirement is the average end-of-day balance for a maintenance period that an institution holds in an account directly at a Federal Reserve Bank or indirectly through a pass-through correspondent to satisfy its reserve balance requirement.  An excess balanace is the average end-of-day balance for a maintenance period that an institution holds in its account above the institution’s balance maintained to satisfy a reserve balance requirement.

The interest rate for balances maintained to satisfy reserve balance requirements is determined by the Board of Governors and is intended to eliminate the implicit tax that reserve requirements impose on depository institutions. The interest rate for excess balances is also determined by the Board of Governors and gives the Federal Reserve an additional tool for the conduct of monetary policy. The interest rates for balances maintained to satisfy reserve balance requirements and excess balances for a given maintenance period are posted to the Board of Governors’ website.

Interest payments are credited to a depository institution’s account at the Federal Reserve fifteen days after the close of a reserve maintenance period to allow for the application of reserve carry-over. The formula used to calculate interest payments is:

where, balance is either the average balance maintained to satisfy a reserve balance requirement or the average excess balance maintained in whole dollars by the institution during a maintenance period. Rate is the interest rate in percentage points set by the Board of Governors and n refers to the number of days in an institution’s maintenance period (seven days or fourteen days).