References to an “interest on required reserves” (“IORR”) rate and to an “interest on excess reserves” (“IOER”) rate would be replaced with a single “interest on reserve balances” (“IORB”) rate under a proposal for amending Regulation D issued by the Federal Reserve Tuesday.
The Fed said the proposed amendments (subject to a 60-day comment period) would make other conforming changes, such as simplifying the formula used to calculate the amount of interest paid on balances maintained by or on behalf of eligible institutions in master accounts at Federal Reserve Banks.
Since March, transaction account reserve requirement ratios have been set to zero, largely in response to the financial impact of the coronavirus crisis. As a result, depository institutions no longer have had to maintain balances to satisfy a reserve balance requirement. However, banks still receive earnings from their local Federal Reserve Banks on the reserves still held – but those reserves are based on the IORR and IOER rates (both set at 0.10%). “Regulation D also applies the IORR rate and the IOER rate to balances maintained by or on behalf of eligible institutions based on whether such balances are or are not maintained to satisfy reserve balance requirements,” the Fed noted.
To account for such changes, the Fed said its proposal amends Regulation D in two ways. First, the proposed amendments would replace references to an IORR rate and an IOER rate with references to a single “interest on reserve balances” (“IORB”) rate. Second, the Fed said, the proposed amendments would streamline the calculation of interest by multiplying the IORB rate on a day by the balances maintained on that day.
“The proposed amendments would eliminate the unnecessary distinction between institutions that maintain balances above or below an amount related to reserve requirements,” the Fed said.
Additionally, the agency announced it is proposing to amend Regulation D to refer to balances maintained in “excess balance accounts” (“EBAs”) as “balances” rather than as “excess balances” and to apply the proposed “IORB” rate and proposed interest calculation to such balances.