### Mechanics of Reserve Maintenance

The following four examples, A through D, illustrate the mechanics of reserve maintenance. The mechanics illustrated include the calculations of a reserve balance requirement, the creation of a penalty-free band, the determination of balances maintained to satisfy reserve balance requirements, and the calculation of excess balances.

Table 5.1 provides the data used in the four examples. Examples A, B, and C describe situations when an institution has satisfied its reserve balance requirement. Example D provides what happens when an institution only partially satisfies its reserve balance requirement.

These examples are also applicable to correspondent institutions that pass through balances to satisfy reserve balance requirements of their respondent institutions. For accounts with pass-through balances, the reserve balance requirement would be the sum of the correspondent's own reserve balance requirement plus the total of the reserve balance requirements for all of its respondents.

#### Table 5.1. Mechanics of Reserve Maintenance, Examples A through D

(thousands of dollars)

Examples A B C \$ 1,500 \$ 1,400 \$ 1,600 \$ 1,700 \$ 200 \$ 300 \$ 150 \$ 500 \$ 1,300 \$ 1,100 \$ 1,450 \$ 1,200 \$ 1,430 \$ 1,210 \$ 1,595 \$ 1,320 \$ 1,170 \$ 990 \$ 1,305 \$ 1,080 \$ 1,250 \$ 1,150 \$ 1,800 \$ 900 \$ 1,250 \$ 1,150 \$ 1,595 \$ 900 \$ - \$ - \$ 205 \$ - \$ - \$ - \$ - \$ 180

### Example A. Balances Maintained between the Bottom of the Penalty-Free Band and the Reserve Balance Requirement

The institution's vault cash of \$200,000 (line 2) is insufficient to cover its \$1,500,000 (line 1) reserve requirement. Therefore, the institution has a reserve balance requirement of \$1,300,000. The top of the institution's penalty-free band is \$1,430,000 (line 4), which is calculated as the reserve balance requirement (line 3) plus the greater of \$50,000 or 10 percent of the reserve balance requirement. The bottom of the institution's penalty-free band is \$1,170,000 (line 5), calculated as the reserve balance requirement (line 3) minus the greater of \$50,000 or 10 percent of the reserve balance requirement (line 3). The bottom of the penalty-free band has a lower bound of zero.

To satisfy its reserve balance requirement, the institution has to maintain an average balance during the reserve maintenance period at least equal to the bottom of the penalty free band or \$1,170,000 (line 5). The institution's average maintained balance of \$1,250,000 (line 6) is below its reserve balance requirement, but above the bottom of the penalty-free band (line 5). Thus, the institution has satisfied its reserve balance requirement. The institution will earn interest on the average maintained balance of \$1,250,000 (line 7) at the IORR rate as described in equation 2 in section 4, Maintenance of Reserve Balance Requirements. Assuming the average IORR rate over the maintenance period is 25 basis points, the institution will receive an interest payment of \$121.53.

### Example B. Balances Maintained between the Reserve Balance Requirement and the Top of the Penalty-Free Band

The institution's vault cash of \$300,000 (line 2) is insufficient to cover its \$1,400,000 (line 1) reserve requirement. Therefore, the institution has a reserve balance requirement of \$1,100,000. The top of the institution's penalty-free band is \$1,210,000 (line 4), which is calculated as the reserve balance requirement (line 3) plus the greater of \$50,000 or 10 percent of the reserve balance requirement. The bottom of the institution's penalty-free band is \$990,000 (line 5), calculated as the reserve balance requirement (line 3) minus the greater of \$50,000 or 10 percent of the reserve balance requirement. The bottom of the penalty-free band has a lower bound of zero.

To satisfy its reserve balance requirement, the institution has to maintain an average balance during the reserve maintenance period at least equal to the bottom of the penalty free band or \$990,000 (line 5). The institution's average maintained balance of \$1,150,000 (line 6) is above its reserve balance requirement, but below the top of the penalty-free band. Thus, the institution has more than satisfied its reserve balance requirement. The institution will earn interest on the average maintained balance of \$1,150,000 (line 7) at the IORR rate as described in equation 2 in section 4, Maintenance of Reserve Balance Requirements. Assuming the average IORR rate over the maintenance period is 25 basis points, the institution will receive an interest payment of \$111.81.

### Example C. Balances Maintained Above the Top of the Penalty-Free Band

The institution's vault cash of \$150,000 (line 2) is insufficient to cover its \$1,600,000 (line 1) reserve requirement. Therefore, the institution has a reserve balance requirement of \$1,450,000. The top of the institution's penalty-free band is \$1,595,000 (line 4), which is calculated as the reserve balance requirement (line 3) plus the greater of \$50,000 or 10 percent of the reserve balance requirement. The bottom of the institution's penalty-free band is \$1,305,000 (line 5), calculated as the reserve balance requirement (line 3) minus the greater of \$50,000 or 10 percent of the reserve balance requirement. The bottom of the penalty-free band has a lower bound of zero.

To satisfy its reserve balance requirement, the institution has to maintain an average balance during the reserve maintenance period at least equal to the bottom of the penalty free band or \$1,305,000 (line 5). The institution's average maintained balance of \$1,800,000 (line 6) is above its reserve balance requirement and the top of its penalty-free band. Thus, the institution has more than satisfied its reserve balance requirement. The institution will earn interest on its balances as described in equation 1 in section 4, Maintenance of Reserve Balance Requirements. Assuming the average IORR rate over the maintenance period is 25 basis points, the IOER rate is 25 basis points each day of the maintenance period, and the institution holds the same level of total balances each day, the institution will receive an interest payment of \$175.00.

### Example D. Balances Maintained Below the Bottom of the Penalty-Free Band

The institution's vault cash of \$500,000 (line 2) is insufficient to cover its \$1,700,000 (line 1) reserve requirement. Therefore, the institution has a reserve balance requirement of \$1,200,000. The top of the institution's penalty-free band is \$1,320,000 (line 4), which is calculated as the reserve balance requirement (line 3) plus the greater of \$50,000 or 10 percent of the reserve balance requirement. The bottom of the institution's penalty-free band is \$1,080,000 (line 5), calculated as the reserve balance requirement (line 3) minus the greater of \$50,000 or 10 percent of the reserve balance requirement. The bottom of the penalty-free band has a lower bound of zero.

To satisfy its reserve balance requirement, the institution has to maintain an average balance during the reserve maintenance period at least equal to the penalty free band or \$1,080,000 (line 5). The institution's average maintained balance of \$900,000 (line 6) is below its reserve balance requirement and the bottom of its penalty-free band. Thus, the institution has a reserve deficiency of \$180,000 (line 9), which is equal to the difference between the bottom of the institution's penalty-free band, \$1,080,000 (line 5), and the average balance maintained of \$900,000. This deficiency amount will be subject to a reserve deficiency charge at a rate of one percentage point above the rate in effect for borrowing under the primary credit facility from the institution's Reserve Bank on the first day of the calendar month in which the deficiency occurred. The institution also will earn interest on the \$900,000 (line 7) of balances maintained at the IORR rate as described in equation 2 in section 4, Maintenance of Reserve Balance Requirements. Assuming the average IORR rate over the maintenance period is 25 basis points, the institution will receive an interest payment of \$87.50.