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From Banking and Finance Law Daily, December 21, 2015

Fed eases reserve requirements for depository institutions

By Lisa M. Goolik, J.D.

To help move the Federal funds rate into the target range established by the Federal Open Market Committee last week, the Federal Reserve Board issued a final rule raising the rate of interest paid on balances maintained to satisfy reserve balance requirements (IORR) and the rate of interest paid on excess balances (IOER) maintained at Federal Reserve Banks by or on behalf of eligible institutions to .50 percent—a .25 percentage point increase. While the IORR and IOER rate increase took effect on Dec. 17, 2015, the implementing amendments to Regulation D—Reserve Requirements of Depository Institutions (12 C.F.R. Part 204) take effect Dec. 22, 2015.

Reserve requirements. Regulation D, which implements Section 19 of the Federal Reserve Act, provides that a depository institution must meet its reserve requirement by holding cash in its vault, or if vault cash is insufficient, by maintaining a balance in an account at a Reserve Bank. Those balances may receive earnings to be paid by the Reserve Bank at least once each quarter, at a rate not to exceed the general level of short-term interest rates.

When the FOMC announced the increase in the federal funds rate from a target range of 0 to .25 percent to a target range of .25 to .50 percent, on Dec. 16, 2015, the Fed simultaneously released an implementation note indicating that the Fed voted unanimously to raise the IORR and IOER to .50 percent, effective Dec. 17, 2015. The amendments to Reg. D reflect the change.

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