Fed Survey: IOER Levels Not Driving Reserve Decisions

Banks do not base decisions on how much they should hold in reserve at the Federal Reserve Banks on their 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, 41.3% said that seeking the IOER rate was not important; just 5.3% said that 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.

The survey results, which align with results obtained six months prior, come as the Fed has been defending its practice of paying interest on reserves as an essential monetary policy tool. The American Bankers Association 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.