Excess Balance Account Frequently Asked Questions

Background and Eligibility

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Q: What is an excess balance account?

A: An excess balance account is a limited-purpose account at a Federal Reserve Bank established for maintaining the excess balances of one or more institutions (participants) that are eligible to earn interest on balances held at the Federal Reserve Banks. An excess balance account is managed by an agent on behalf of the participants.

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Q: Why is the Federal Reserve Bank offering excess balance accounts?

A: Excess balance accounts are intended to allow eligible institutions to earn interest on their excess balances in an account relationship directly with a Federal Reserve Bank without significantly disrupting established business relationships with their correspondents. Under the current configuration of interest rates, some respondents appear to prefer holding their excess balances in an account at the Federal Reserve Bank, rather than selling them through a correspondent in the federal funds market. When a correspondent holds its respondents’ excess balances in its account at its Federal Reserve Bank (and passes back the interest to its respondents), the correspondent’s assets increase and its regulatory leverage ratio may fall. Excess balance accounts permit the correspondent to serve as agent when placing the respondents’ excess balances at the Federal Reserve Bank. Balances in the excess balance account are an asset of the participants in the account, not the agent that manages the account; therefore, balances in an excess balance account would not be assets of the agent and would not be included in the calculation of the agent’s regulatory leverage ratio.

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Q: When will excess balance accounts be available?

A: Excess balance accounts will be available starting with the reserve maintenance period beginning on July 2, 2009. Although these accounts are authorized temporarily, a sunset date has yet to be established.

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Q: Why are excess balance accounts temporary?

A: Current financial market conditions are exerting pressure on correspondent-respondent relationships. Excess balance accounts are intended to mitigate that pressure. As market conditions evolve, the Board will evaluate the continuing need for excess balance accounts.

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Q: Which institutions may act as agent for an excess balance account?

A: An institution that wishes to act as agent for an excess balance account must have its own account at a Federal Reserve Bank. The institution must also have the ability to carry out the responsibilities of an agent and comply with the terms and conditions established by the Federal Reserve Bank with respect to the operation of the excess balance account. An agent for an excess balance account need not be eligible to earn interest on its own balance maintained at a Federal Reserve Bank.

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Q: Which institutions may be participants in an excess balance account?

A: Each participant in an excess balance account must be eligible to earn interest on its balances at a Federal Reserve Bank. Institutions that are eligible to earn interest are depository institutions (banks, savings banks, mutual savings banks, savings associations, and credit unions), branches and agencies of foreign banks, Edge Act and agreement corporations, and trust companies.

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Q: How does an excess balance account differ from the pass-through correspondent/respondent relationship that a participant may already have with a correspondent?

A: The Board’s Regulation D provides that balances in a pass-through correspondent’s account at a Federal Reserve Bank represent a liability of the Federal Reserve Bank to that pass-through correspondent, even though the account may contain funds that are attributable to one or more of the pass-through correspondent’s respondent institutions. Balances in an excess balance account represent a liability of the Federal Reserve Bank to the participants alone, not to the agent.

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Q: Is participation in an excess balance account required by the Federal Reserve?

A: No. Participation in an excess balance account is strictly voluntary. However, beginning on July 2, 2009, Federal Home Loan Banks will no longer be paid interest on excess balances held in their master accounts at Federal Reserve Banks. Any depository institution that uses a Federal Home Loan Bank as a pass-through correspondent will no longer earn interest on its excess balances, unless the excess balances are held in an excess balance account.

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