Interest on Reserves

Interest on reserves is the interest a central bank pays to commercial banks on the money they keep in their accounts at the central bank. Those balances, called reserves, are the safest and most liquid asset a bank can hold, and they are what banks use to settle payments with each other. By choosing the rate it pays on them, a central bank sets a floor under the rates at which banks are willing to lend, which makes interest on reserves one of the main instruments of modern monetary policy.

In the United States the rate is called interest on reserve balances (IORB) and is set by the Board of the Federal Reserve. The European Central Bank (ECB) pays its deposit facility rate on overnight deposits, and the Bank of England pays Bank Rate on reserves. The idea is closely tied to reserve money and to central bank money more generally.

Think of reserves as the cash that banks park at the central bank overnight. If the central bank pays, say, 4% on that parked cash, a bank has no reason to lend the same money to another bank for less than 4%. The interest on reserves therefore works like a reserve price at an auction: market rates settle at or just around it.

That gives the central bank a simple lever. Raising the rate it pays pulls other short-term rates up with it; lowering it pushes them down. It does not need to change how much money is in the system to move rates, which matters when there is a very large amount of it.

Before 2008 the Fed paid nothing on reserves, and it controlled the federal funds rate by keeping reserves scarce and adjusting their supply daily through open market operations. Congress authorised payment of interest in the Financial Services Regulatory Relief Act of 2006, effective in 2011, and the Emergency Economic Stabilization Act brought the start date forward to October 2008. The timing mattered: quantitative easing was about to flood banks with trillions of dollars of reserves, and without interest on them the overnight rate would have stuck at zero whatever the Fed wanted.

Paying interest lets a central bank separate the size of its balance sheet from the level of rates. This is known as a floor system or "ample reserves" regime, which the Fed formally adopted in 2019. In July 2021 the Fed merged its separate rates on required and excess reserves into the single IORB rate; reserve requirements themselves had been cut to zero in March 2020 (see reserve requirement).

A bank's annual income from reserves is its average balance multiplied by the rate:

• $R$ is the bank's average reserve balance over the year.
• $i_{\text{IORB}}$ is the annual interest rate paid on reserves, written as a decimal.

For example, a bank that keeps an average of $2 billion of reserves at a rate of 3.90% earns $2{,}000{,}000{,}000 \times 0.039$, which is $78 million a year, with no credit risk. Interest accrues daily, so in practice the bank earns a slice of this each day its balance is held. With effect from 29 October 2026 the Fed's IORB rate was 3.90%, inside its 3.75–4.00% target range for the federal funds rate.

• Euro area. The ECB's deposit facility rate, 2.50% from 16 September 2026, is its main signal of policy. While that rate was negative between 2014 and 2022, banks were effectively charged for holding excess reserves, and from 2019 to 2022 a two-tier system exempted part of them. Since September 2023 the ECB pays 0% on banks' minimum required reserves.
• United Kingdom. Since 2009 the Bank of England has paid Bank Rate on all reserves held under its Sterling Monetary Framework.
• Japan and Switzerland. The Bank of Japan and the Swiss National Bank used tiered systems during their periods of negative interest rates, applying the negative rate only to part of each bank's balance.

When rates are high and reserves are large, interest on reserves becomes a big expense. From late 2022 the Fed's interest payments on reserves and reverse repos exceeded the income on its bond holdings, so it stopped sending profits to the Treasury and recorded a "deferred asset" to be repaid from future earnings. The Bank of England's losses on its gilt portfolio are covered by HM Treasury. This loss of seigniorage income has made the practice politically sensitive.

Critics in the US Congress and some UK commentators describe the payments as a subsidy to banks and have proposed ending them or paying interest only on part of reserves. Defenders, including the Fed and the Bank of England, argue that without the payments they would lose control of short-term rates, or would have to sell assets quickly through quantitative tightening and risk disrupting markets. Some economists also argue that a high rate on reserves encourages banks to hold safe balances rather than lend, a credit-supply concern others dispute. The debate is linked to how a central bank should set its neutral rate and its interest rates generally.

• Federal Reserve: Interest on Reserve Balances