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I'm not understanding why the Fed decided to introduce their Overnight Reverse Repo Facility (ON RRP).

From the St. Louis Fed, it helps to provide a floor for the Federal Funds Rate (FFR), a market-determined rate at which banks lend to one another.

Not every financial institution that operates in the federal funds market has access to interest on reserves. So, the FFR could fall below the setting of the Interest of Reserves (IOR) rate.

To aid in the control of the level of the FFR, the Fed introduced the overnight reverse repurchase agreement (ON RRP) facility to a broad set of financial institutions.

Another option seems to be simple, giving more institutions accounts at fed banks, allowing them to also get IOR. Or even allow them accounts, but do not give them the same interest as depository institutions.

Further, ON RRP is no longer cash, so there must be use for the Fed to be ridding themselves of Treasuries overnight, but it's not clear why.

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Some banks are "non-member banks". A non-member bank is not subject to the requirements of a member bank of the Federal Reserve system.

Here is a link to a reference from the Journal of Finance, June 1975.

It says reserve requirements for nonmember banks are less onerous and reporting requirements for nonmember banks in most states are "less restrictive".

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  • $\begingroup$ Ok, but why introduce ON RRP if they could just let more institutions access fed accounts? And why securities? $\endgroup$ Aug 21, 2022 at 0:10
  • $\begingroup$ @tattarrattat It is less onerous for a bank to not have a Fed account. $\endgroup$
    – H2ONaCl
    Aug 21, 2022 at 0:49
  • $\begingroup$ We're talking about hundreds of millions of dollars here resulting in significant interest for the organizations to reap, not to mention that many of these organizations are themselves government entities. If they could choose, they would ask for IOR rates, but it is not their decision, it is a fed decision. Thus the question. $\endgroup$ Aug 21, 2022 at 4:01
  • $\begingroup$ I think you are assuming there was a huge difference between the FFR that a non-member bank can earn and the IOR rate that a member can earn. Obviously there was some difference which motivated the introduction of reverse repo to a "broad set" of institutions but now with reverse repo the difference would be smaller. $\endgroup$
    – H2ONaCl
    Aug 21, 2022 at 22:34
  • $\begingroup$ No, I'm not. My question assumes what you just wrote ("there was some...smaller.") and follows from it. Namely why choose a reverse repo? What benefits/risks does it entail when the Fed could have easily given them bank accounts with a lower rate of interest than the IOR and called it a day. $\endgroup$ Aug 21, 2022 at 23:00

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