Interest on excess reserves

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The practice of central banks of paying interest on deposits from depository institutions (notably commercial banks) that are in excess of amount of deposits that the bank may be required to hold (together with cash) in view of its liabilities or for other regulatory reasons.

Payment of interest on excess balances means that banks are less likely to lend central bank deposits (reserves) among themselves (in "interbank" or (US) "federal funds" transactions) at rates below the rate paid on the excess. Varying the interest rate on excess reserves, then, allows the central bank to influence short-term rates in the economy generally.

In the US the Federal Reserve introduced a policy, its "IOR policy", of paying interest on monetary institutions deposits ("reserves") in October 2008 and both required and excess reserves are remunerated. The Financial Services Regulatory Relief Act of 2006 authorised payment of interest on balances of or on behalf of depository institutions beginning October 1, 2011 but the Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.