What Are Reserve Balances: IORB, Eligibility, and Short-Term Rates

Reserve balances are the funds that banks and other depository institutions keep at the Federal Reserve, together with the physical cash held in their vaults. As of late February 2026, depository institutions held roughly $2.97 trillion in reserve balances at the Fed alone.¹ Every wire transfer, check clearance, and interbank settlement ultimately moves through these balances, and the Fed pays interest on them at a rate currently set at 3.65 percent.²

What Counts as a Reserve Balance

A reserve balance has two pieces. The first is vault cash, the physical currency and coin a bank keeps in its branches and ATMs to meet customer withdrawals. The second is the digital balance in the institution’s master account at its regional Federal Reserve Bank, used to settle electronic payments with other banks. Both count toward total reserves, but the digital balance dwarfs vault cash at most institutions and is where monetary policy actually operates.³

The legal framework is Regulation D, codified at 12 CFR Part 204. It defines what counts as a reservable liability, which institutions must report, and how the numbers are computed. Regulation D historically imposed specific reserve ratios, forcing banks to hold a minimum percentage of deposits either in vault cash or at the Fed. Those ratios are now zero, but the classification and reporting rules still apply.⁴

Which Institutions Hold Reserve Balances

Commercial banks, savings banks, savings and loan associations, and credit unions all participate. Edge Act corporations, which handle international banking, are included, as are U.S. branches and agencies of foreign banks. Any institution offering transaction accounts, nonpersonal time deposits, or Eurocurrency liabilities falls under Regulation D.⁴

The Federal Reserve System draws a line between member banks and non-member depository institutions. Member banks — all nationally chartered banks, plus any state-chartered banks that opt in — must purchase stock in their regional Federal Reserve Bank.⁵ Non-member institutions do not hold Fed stock, but they still maintain master accounts and use Federal Reserve payment services. Both groups report under the same Regulation D framework.

A U.S. branch or agency of a foreign bank must comply with Regulation D on the same terms as a member bank if the parent foreign bank has worldwide consolidated assets over $1 billion, or is controlled by a foreign company with that level of aggregate assets. Smaller foreign bank branches that qualify as insured banks maintain reserves as non-member depository institutions. Branches and agencies in the same state and Federal Reserve district file on an aggregated basis and cannot deduct balances owed from another U.S. branch of the same parent when computing reserves.⁴

Pass-Through Arrangements

Not every institution holds its reserve balance directly at a Federal Reserve Bank. Regulation D permits a pass-through arrangement in which a smaller institution, the respondent, holds its balance at a larger correspondent bank, which keeps that money on deposit at the Fed. A respondent can select only one pass-through correspondent at a time unless the local Reserve Bank grants an exception.⁴

The correspondent carries real responsibility. It must hold balances sufficient to cover all of its respondents’ obligations, and any deficiency charge falls on the correspondent rather than the respondent. It also has to keep detailed records for each respondent showing that enough funds were provided. If recordkeeping falls short, the Federal Reserve Bank can terminate the arrangement.⁴

Why Banks Now Hold Reserves Voluntarily

For decades, banks had to hold a specific fraction of their transaction deposits in reserve. Larger banks faced a 10 percent ratio, smaller banks 3 percent, and the smallest institutions were exempt. In March 2020, the Board of Governors reduced all reserve requirement ratios to zero percent, freeing an estimated $200 billion in bank liquidity.⁶

The regulatory scaffolding is still in place. The Fed continues to adjust the exemption amount and the low reserve tranche annually. For 2026, the exemption amount is $39.2 million (up from $37.8 million in 2025) and the low reserve tranche is $674.1 million (up from $645.8 million). Every tier carries a zero percent ratio, so these numbers are academic for now, but they would matter again if the Board ever restored positive requirements.⁷

Banks now hold reserves voluntarily. The Fed operates under what it calls an ample reserves framework, keeping the supply of reserves large enough that short-term interest rates stay within the target range without daily open market operations to fine-tune supply. The interest rate paid on reserves is the tool that makes this framework work.

How the Fed Pays Interest on Reserves

The statutory authority comes from the Federal Reserve Act, which lets Federal Reserve Banks pay earnings on balances maintained by or for depository institutions, at a rate not exceeding the general level of short-term interest rates, paid at least once per calendar quarter.⁸

Before March 2020, the Fed used two rates, one for required reserves and one for excess reserves. Once reserve requirements dropped to zero, the distinction lost meaning, and effective July 29, 2021, the Board consolidated the two into a single Interest on Reserve Balances rate, or IORB.⁹

The Board of Governors, not the FOMC, sets the IORB rate, though the two coordinate closely. The FOMC sets the target range for the federal funds rate (currently 3.50 to 3.75 percent), and the Board calibrates IORB to steer actual trading within that range. As of early March 2026, IORB stands at 3.65 percent.²

The Fed also evaluates balances over a two-week maintenance period that runs from Thursday through the second Wednesday after. Averaging over that window prevents a single bad day from causing problems, since an institution that runs low on Monday can hold more later in the period. Interest accrues daily based on the end-of-day balance in the master account, but the Fed does not pay it out daily. Accumulated interest for all days in a maintenance period is credited to the institution’s account one business day after the period ends.⁹

How IORB Steers Short-Term Rates

The IORB rate acts as a floor under the federal funds rate. If a bank can earn 3.65 percent risk-free by leaving money at the Fed overnight, it has little reason to lend that money to another bank for less. That puts a natural bottom under the rate banks charge each other for overnight loans.¹⁰

The Fed reinforces this floor with the overnight reverse repurchase agreement facility, which offers a rate slightly below IORB, currently 3.50 percent. The ON RRP extends the floor to non-bank counterparties like money market funds, which cannot earn IORB but can park cash at the Fed through reverse repos. Together, IORB and the ON RRP form the lower bound of the rate corridor, and the discount window lending rate sits above the target range as the ceiling. This setup lets the Fed control short-term rates without actively managing the daily supply of reserves the way it did before 2008.¹¹

For banks, IORB is a guaranteed return on idle liquidity, which keeps a large pool of reserves parked at the Fed. If the Fed wants to tighten conditions, it raises IORB along with the target range, making banks less willing to lend cheaply. If it wants to ease conditions, it lowers the rate, nudging banks toward lending to the private sector rather than sitting on reserves. One rate adjustment ripples across money markets almost immediately, and that is the point.

1
Board of Governors of the Federal Reserve System. Factors Affecting Reserve Balances – H.4.1
2
Federal Reserve Bank of St. Louis. Interest Rate on Reserve Balances (IORB Rate)
3
Board of Governors of the Federal Reserve System. Credit and Liquidity Programs and the Balance Sheet
4
eCFR. Part 204 Reserve Requirements of Depository Institutions (Regulation D)
5
eCFR. 12 CFR Part 209 – Federal Reserve Bank Capital Stock (Regulation I)
6
Board of Governors of the Federal Reserve System. Reserve Requirements
7
Federal Register. Regulation D: Reserve Requirements of Depository Institutions
8
Office of the Law Revision Counsel. 12 US Code 461 – Reserve Requirements
9
Federal Reserve Board. Interest on Reserve Balances (IORB) Frequently Asked Questions
10
Federal Reserve Bank of New York. Monetary Policy Implementation
11
Board of Governors of the Federal Reserve System. Interest on Reserve Balances