Alert October 07, 2008

FRB to Pay Interest on Depository Institutions’ Required and Excess Reserves; FRB Issues Interim Final Rule Amending Regulation D

The FRB was granted authority to pay interest on reserves commencing on October 1, 2011 by the Financial Services Regulatory Relief Act of 2006.  Section 128 of the Emergency Economic Stabilization Act of 2008 accelerated, from October 1, 2011 to October 1, 2008, the FRB’s authority to pay interest on depository institutions’ required and excess reserve account balances with the FRB. 

The FRB announced that it will now begin to pay interest on depository institutions’ reserve accounts, effective with the reserve maintenance period beginning October 9, 2008.  The FRB stated that “the payment on excess reserve balances will give the [FRB] greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target established by the Federal Open Market Committee.”

To implement the change, the FRB issued an interim final rule (the “Rule”) that amends the FRB’s Regulation D, “Reserve Requirements of Depository Institutions.”  The Rule is effective October 9, 2008 and comments are due by November 21, 2008.