This bill would amend the Federal Reserve Act to prohibit Federal Reserve Banks from paying interest on surplus reserve balances held for depository institutions. This prohibition would not apply to required reserve balances.
Warren Davidson
Representative
OH-8
The Prohibition on IOER Act of 2025 amends the Federal Reserve Act to prohibit Federal Reserve Banks from paying interest on surplus reserve balances held for a depository institution. This means that the Federal Reserve Banks can only pay interest on required reserve balances.
Federal Reserve Nixes Interest Payments on Excess Bank Funds Under New Law
The "Prohibition on IOER Act of 2025" changes a key part of how the Federal Reserve interacts with banks. The Fed will no longer pay interest on surplus funds that banks park with them. It's a bit technical, but here's the gist:
Banking's New Bottom Line
Currently, banks can earn interest on all funds they hold at the Federal Reserve – both the money they're required to keep there (required reserves) and any extra cash (surplus reserves). This bill, however, stops interest payments on those surplus reserves (SEC. 2). Banks will still earn interest on the required portion, but not a dime on anything above that. Think of it like a savings account: you'll get interest on the minimum balance required, but not on any extra cash you put in.
Real-World Ripple Effects
So, what does this mean for the rest of us? It could play out in a few ways:
- More Lending, Maybe: Banks, no longer getting a guaranteed return on their extra cash at the Fed, might decide to lend more of it out to businesses and individuals. This could mean more loans for that new equipment, home renovation, or small business expansion. For example, a local construction company that was previously having trouble getting a loan for a new excavator might find banks more willing to lend.
- Or, Banks Get Creative: Banks might look for other ways to make up for the lost interest income. This could involve new fees, changes to existing services, or finding loopholes – the world of finance is nothing if not inventive.
- Fed's Flexibility: This changes one tool the Federal Reserve uses to manage the economy. Whether that's a big deal or not is up for debate, but it does remove an option from their toolbox.
The Big Picture
This law is about more than just bank accounts – it's a tweak to the financial system's plumbing. While it might seem minor, changes at this level can have knock-on effects. Will it actually boost lending? Will banks find ways around it? It's a bit of a wait-and-see situation, but it's a clear shift in how the Fed and banks do business.