In the US context: Circa 2020 the minimum reserve balance requirement was removed, so I am not sure why do institutions need to borrow and lend overnight reserves among themselves?

As far as I understand, Interest on Reserve Balances, is the way monetary policy is currently transmitted. So I thought the old federal funds rate didn't exist any more (given that the minimum reserve requirements are gone).

However, Federal Reserve implementation note to the FOMC includes a directive to maintain federal reserve funds within a band, similar to the old regime. What does the federal funds rate even mean when there is no minimum reserve requirement and therefore institutions don't need to borrow reserves overnight?


1 Answer 1


They still need to borrow reserves due to different regulations. For example, Basel III requires all banks to have sufficient liquidity. An excess reserve of bank counts towards the bank liquidity requirement, and with reserve requirement being zero every reserve is excess reserve. Also excess reserves have very high liquidity so they are more attractive compared to many alternatives. Consequently, banks still need reserves to operate; there is just no longer a need for some pre-specified number of reserves - the actual amount depends on what the bank does and their balance sheet.


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