On Monday, the Federal Reserve announced that it will begin paying interest on financial institution required and excess reserve balances.
In the Fed's words:
The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.
Employing the accelerated authority, the Board has approved a rule to amend its Regulation D (Reserve Requirements of Depository Institutions) to direct the Federal Reserve Banks to pay interest on required reserve balances (that is, balances held to satisfy depository institutions’ reserve requirements) and on excess balances (balances held in excess of required reserve balances and clearing balances).
The interest rate paid on required reserve balances will be the average targeted federal funds rate established by the Federal Open Market Committee over each reserve maintenance period less 10 basis points. Paying interest on required reserve balances should essentially eliminate the opportunity cost of holding required reserves, promoting efficiency in the banking sector.
The rate paid on excess balances will be set initially as the lowest targeted federal funds rate for each reserve maintenance period less 75 basis points. Paying interest on excess balances should help to establish a lower bound on the federal funds rate. The formula for the interest rate on excess balances may be adjusted subsequently in light of experience and evolving market conditions. The payment of interest on excess reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the liquidity necessary to support financial stability while implementing the monetary policy that is appropriate in light of the System’s macroeconomic objectives of maximum employment and price stability.
NCUA will hold a share insurance webinar today. There may still be time to sign up here. There are a few questions that I hope NCUA will clear up soon.
- Do credit unions have to replace all their share insurance signs at teller windows? What about the share insurance advertising statement?
The interim final rule for revocable trust accounts created different insurance rules for accounts at or below $500,000 and for those above. Did the legislation that recently increased insurance amounts also increase that rule threshold? The FDIC has indicated that it did for banks and thrifts. There's no word yet from NCUA on this issue.
As I've stated before, stay tuned.