Sponsor
Warren Davidson
Representative · R-OH
Introduced January 3, 2025 by Warren Davidson · Last progress January 3, 2025
The bill removes Federal Reserve payments on reserve balances to curb perceived subsidies and lower some bank costs, but does so at the expense of bank revenue, short-term liquidity incentives and a Federal Reserve policy tool that supports monetary implementation and stability.
Depository institutions (banks) will stop receiving earnings on balances at Federal Reserve Banks, reducing their interest expense and potentially lowering passthrough costs to customers or taxpayers.
Limits Federal Reserve payments on bank balances, reducing what some view as subsidies to banks and increasing perceived accountability and transparency of Fed earnings policy.
Constraining remuneration of reserve balances could limit the Federal Reserve's balance-sheet policy tools and complicate monetary policy implementation, making it harder to manage interest rates and financial stability.
Could reduce banks' incentives to hold balances at the Fed, weakening short-term funding liquidity and potentially increasing volatility in short-term funding markets.
Banks that earned income from reserve balances will lose a revenue source, which could reduce bank profits or lead them to raise fees for customers.
Based on analysis of 2 sections of legislative text.
Prohibits Federal Reserve Banks from paying earnings (interest) on balances that depository institutions hold at Reserve Banks, except where an explicit statutory exception applies. The change narrows the Fed’s statutory authority to pay interest on surplus or other balances held for banks. The amendment directly affects Federal Reserve operational tools and depository institutions that hold reserve balances. It could change banks’ incentives about holding reserves, alter short-term interest-rate mechanics, and require operational and policy adjustments at Reserve Banks and in money markets.
Bars Federal Reserve Banks from paying interest/earnings on balances held at Reserve Banks by depository institutions, except where a statute explicitly permits payment.
Representative · R-OH