### Maintenance of Reserve Balance Requirements

A depository institution is required to satisfy its reserve requirement in the form of vault cash or if vault cash is insufficient to satisfy the requirement, in the form of a balance maintained either directly with a Reserve Bank or in a pass-through arrangement (See Maintenance Options). The portion of the reserve requirement that is not satisfied by vault cash is called the reserve balance requirement. An institution is responsible for satisfying its reserve balance requirement by holding balances on average over a 14-day maintenance period in an account at the Federal Reserve (See Maintenance Responsibility). The Federal Reserve provides institutions with some flexibility in meeting its reserve balance requirement during a reserve maintenance period in the form of a penalty-free band (See Maintenance Flexibility). Balances maintained within the penalty-free band will be remunerated at the interest rate on balances maintained to satisfy reserve balance requirements (see Interest on Reserve Balances).

### Maintenance Options

A depository institution that is required to maintain reserve balances may choose either to satisfy its reserve balance requirement directly with its Reserve Bank or to pass its reserve balance requirement through a correspondent's account. If an institution elects to satisfy its reserve balance requirement directly with the Federal Reserve, all end-of-day balances maintained in the institution's master account during the reserve maintenance period are used to satisfy its reserve balance requirement. Funds that an institution deposits in a term deposit with the Federal Reserve are removed from an institution's master account and cannot be used to satisfy its reserve balance requirement. For information on term deposits, please visit the Term Deposit Facility Resource Center on the Federal Reserve Bank Services website.

A correspondent holds pass-through reserve balances in a master account, along with the correspondent's own reserve balance requirement, if any. The master account is maintained at the Reserve Bank in the District where the correspondent is located. Eligible correspondents are Federal Home Loan Banks, the National Credit Union Administration Central Liquidity Facility, depository institutions (including U.S. branches and agencies of foreign banks), and banking Edge and agreement corporations that have a master account at a Reserve Bank. The Federal Reserve Board reserves the right to permit other institutions, on a case-by-case basis, to serve as pass-through correspondents.

A respondent institution that passes its reserve balance requirement through a correspondent may request that its correspondent (or another institution) act as an agent and place any funds in excess of the respondent's reserve balance requirement in an excess balance account (EBA). An EBA is a limited-purpose account at a Federal Reserve Bank established for one or more institutions (participants) that are eligible to earn interest on balances held at the Federal Reserve Banks. The EBA is managed on behalf of the participants by an agent. Balances in an excess balance account cannot be used to satisfy a participant's reserve balance requirement. Balances in an EBA earn interest at the interest rate on excess balances. For more information on EBAs, please visit the Excess Balance Account Resource Center on the Federal Reserve Bank Services website.

### Maintenance Responsibility

The reserve balance requirement need only be met on average over the maintenance period. On any given day of the maintenance period, an institution's end-of-day account balance may exceed or fall short of the reserve balance requirement. An institution can offset a daily surplus or shortfall by maintaining lower or higher balances on subsequent days in the maintenance period. However, the balance in the master account at the end of the day should not fall below zero. Negative account balances (overdrafts) at the close of business are normally assessed an overnight overdraft charge. In the event that the account balance at close of business is negative, that negative balance is used in the calculation of the average end-of-day balance for the maintenance period, even if an overdraft charge is waived by the Reserve Bank.

### Maintenance Flexibility

A penalty-free band is a range on both sides of the reserve balance requirement within which an institution needs to maintain its average balance over the maintenance period in order to satisfy its reserve balance requirement. The top of the penalty-free band is equal to the reserve balance requirement plus a dollar amount prescribed by the Board. The bottom of the penalty-free band is equal to the reserve balance requirement minus a dollar amount prescribed by the Board, with a lower bound of zero.

For depository institutions that maintain balances directly with the Federal Reserve, the dollar amount used to establish the top and bottom of the penalty-free band will be set as the greater of $50,000 or 10 percent of a depository institution's reserve balance requirement. For pass-through correspondents, the dollar amount used to establish the top and bottom of the penalty-free band will be set as an amount that is equal to the greater of$50,000 or 10 percent of the aggregate reserve balance requirement of the correspondent (if any) and all of its respondents.

A depository institution has satisfied its reserve balance requirement when the institution maintains a balance, on average over a maintenance period, that is greater than or equal to the bottom of its penalty-free band. See Interest on Reserve Balances for more information on the interest rate that applies to balances maintained to satisfy a reserve balance requirement.

A depository institution has an excess balance when the institution maintains a balance, on average over a maintenance period, that is greater than the top of its penalty-free band. See Interest on Reserve Balances for more information on the interest rate that applies to excess balances.

If an institution maintains an average end-of-day balance over the reserve maintenance period that is less than the bottom of its penalty-free band, then the institution is deficient and will be subject to a reserve deficiency charge. The deficiency amount is calculated as the difference between the bottom of a depository institution's penalty-free band and the institution's average balance maintained over a maintenance period. The charge rate for reserve deficiencies is one percentage point above the rate in effect for borrowing under the primary credit facility from the depository institution's Federal Reserve Bank on the first day of the calendar month in which the deficiency occurred. An institution has 30 calendar days from the end of the maintenance period in which it was charged a reserve deficiency to submit a waiver request to the reserve administration contact at its Reserve Bank for consideration. A list of Reserve Bank contacts for reserves administration is available on the Federal Reserve Bank Services website contacts page.

### Interest on Reserve Balances

The Federal Reserve Banks are authorized to pay interest on balances maintained to satisfy reserve balance requirements and on excess balances.

The interest rate for balances maintained to satisfy reserve balance requirements (IORR rate) is determined by the Board of Governors and is intended to eliminate the implicit tax that reserve requirements impose on depository institutions. The interest rate for excess balances (IOER rate) is also determined by the Board of Governors and gives the Federal Reserve an additional tool for the conduct of monetary policy. The interest rates for balances maintained to satisfy reserve balance requirements and excess balances are available on the Federal Reserve Board website.

Interest payments are credited to a depository institution's account at the Federal Reserve the business day after the close of a reserve maintenance period. The formulas used in determining interest payments distinguish between two basic cases--one in which institutions maintain, on average over the maintenance period, balances in excess of the top of the penalty-free band, and a second in which institutions maintain, on average over the maintenance period, balances that are equal to or lower than the top of the penalty-free band. In the first case, interest payments are calculated as follows:

#### Equation 1. Interest Payment Calculation- Balances in Excess of the Top of the Penalty-Free Band

$${Interest\ Payment} = \overbrace{{14}\times\frac{Avg.\ IORR\ rate}{360}\times{BMRBR}}^{IORR} +\\ \overbrace{\max[0,\sum_{t=1}^{14} (\frac{IOER\ rate_t}{360}\times{Total\ Balances_t}) - ({14}\times\frac{Avg.\ IOER\ rate}{360}\times{BMRBR})]}^{IOER}$$

Where:

14 = the number of days in a reserve maintenance period,
360 = the number of days in the year used to annualize interest,
Avg. IORR rate = arithmetic average of the daily IORR rates in effect over a maintenance period,
BMRBR = average balances maintained to satisfy a reserve balance requirement (up to the top of the penalty-free band) over a maintenance period,
Avg. IOER rate = arithmetic average of the daily IOER rates in effect over a maintenance period, and
Total Balances = daily total balance held.

In the second case, interest payments are calculated as follows:

#### Equation 2. Interest Payment Calculation- Balances Equal to or Lower Than the Top of the Penalty-Free Band

$${Interest\ Payment} = \overbrace{{14}\times\frac{Avg.\ IORR\ rate}{360}\times{BMRBR}}^{IORR}$$

Where:

14 = the number of days in a reserve maintenance period,
360 = the number of days in the year used to annualize interest,
Avg. IORR rate = arithmetic average of the daily IORR rates in effect over a maintenance period, and
BMRBR = average balances maintained to satisfy a reserve balance requirement (up to the top of the penalty-free band) over a maintenance period.

### Eligibility Rules for Interest on Reserve Balances

Federal Reserve Banks are authorized to pay interest on balances held by or on behalf of depository institutions. The term "depository institution" is defined by the Financial Services Regulatory Relief Act of 2006 to include banks, savings associations, savings banks, and credit unions that are federally insured or eligible to apply for federal insurance, trust companies, Edge and agreement corporations, and U.S. branches and agencies of foreign banks. The definition includes bankers' banks and corporate central credit unions, but does not include all institutions that are eligible to act as pass-through correspondents. For example, the National Credit Union Administration Central Liquidity Facility and the Federal Home Loan Banks are not eligible for interest payments.

A correspondent may or may not be eligible to earn interest on balances held in its master account. If a correspondent is eligible, then interest will be paid on the balances maintained to satisfy reserve balance requirements and excess balances, if any. The correspondent may pass back to its respondents the interest received on respondent pass-through balances maintained to satisfy reserve balance requirements and respondent excess balances with any agreements that the correspondent has with its respondents. If the correspondent is not eligible to receive interest payments, then interest will only be paid on the respondents' pass-through balances maintained to satisfy reserve balance requirements, and this interest must be passed back to the respondents. Respondents of correspondents that are not eligible to earn interest will need to participate in an excess-balance-account arrangement or open their own master account at a Federal Reserve Bank in order to earn interest on excess balances.