Single reserve balance interest rate finalized (as proposed), eliminating two-rate scheme

A single interest on reserve balances (IORB) rate will replace two former rates under a final rule amending Regulation D announced Tuesday by the Federal Reserve.

The rule takes effect July 29; it contains no changes from the proposal announced in December (and published in the Federal Register in January).

Under the final rule, references to an interest on required reserves (IORR) rate and to an interest on excess reserves (IOER) rate will be eliminated. Both will be replaced by the IORB rate.

The Fed said the final rule also simplifies the formula used to calculate the amount of interest to be paid on such balances and makes other minor changes.

Since March of 2020, 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 last December.

To account for such changes, the Fed said late last year that the new rule amends Regulation D in two ways, creating a single rate (the IORB) and streamlining the calculation of interest by multiplying the IORB rate on a day by the balances maintained on that day.

Federal Reserve Board issues final rule amending Regulation D with regard to interest on reserve balances