IOER Levels Not Driving Reserve Decisions, Fed Survey Finds

Banks are not basing decisions on how much to hold in reserve at the Federal Reserve Banks on a desire to earn the interest paid on excess reserves, according to a Fed survey of senior financial officers released today. When asked to identify drivers of the lowest reserve levels the bank was comfortable holding, 41.2 percent said that seeking the IOER rate was not important, and 43.1 percent said it was only somewhat important; no respondents said it was very important.

Instead, survey respondents — which included large U.S. banks and U.S. branches of foreign banks — tended to cite managing intraday payment flows, meeting potential deposit outflows and satisfying internal stress metrics as principal reasons. U.S. banks tended to place more weight on meeting outflows, while foreign banks were more focused on internal liquidity metrics.

Respondents indicated that their lowest comfortable level of reserve balances was significantly lower than the amount they held. When asked about whether the lowest comfortable level of reserves would change with different interest rate increases, bankers were roughly split between those that said the level would not change and those who indicated they could economize on reserve balances.

The survey results come as the Fed has been defending its practice of paying interest on reserves as an essential monetary policy tool. ABA has long supported the Fed’s practice as well. In 2016, ABA-sponsored research found that IOER was a critical monetary policy tool, especially in a rising-rate environment, and that IOER neither incentivized banks to avoid lending money nor contributed negatively to the federal budget.