ABA to Fed: Tread Carefully with Interest Payments on Reserves

In a comment letter yesterday, ABA called on the Federal Reserve to work with the banking industry to “navigate thoughtfully” in a post-Dodd-Frank Act environment as interest rates return to normal. Specifically, ABA commented on the Fed’s proposal to change Regulation D’s basis for calculating interest payments for balances banks maintain at the regional Federal Reserve Banks.

ABA warned that as rates rise, the Fed’s proposed policy change could encourage banks to keep funds parked at the Fed, building up “excess balances that otherwise would be put to work in the private sector.” This build-up could eventually concentrate financial institutions’ deposits—and potential systemic risk—within the Fed system. For this and other reasons, ABA requested a review and evaluation after two years. For more information, contact ABA’s Denyette DePierro.