HR 146119th CongressIn Committee

Prohibition on IOER Act of 2025

Introduced: Jan 3, 2025

Standard Summary

Comprehensive overview in 1-2 paragraphs

The Prohibition on IOER Act of 2025 would amend the Federal Reserve Act to end the practice of paying interest on excess reserves (IOER) held by depository institutions at Federal Reserve Banks. The bill reorganizes and clarifies the language around reserve balances, making clear that Federal Reserve Banks may not pay earnings on balances beyond those that are required reserves, except as provided under the paragraph. In effect, if enacted, banks would no longer earn interest on any excess reserves held at the Fed, which could shift incentives for banks to hold large liquidity cushions and could influence the policy tools the Fed uses to implement monetary policy.

Key Points

1Prohibition on IOER: A Federal Reserve Bank may not pay earnings on balances maintained at the Fed by or on behalf of a depository institution if those balances are excess reserves (i.e., reserves beyond what is required to be held).
2Legislative text changes: Amends section 19(b)(12) of the Federal Reserve Act to insert and reinterpret language around reserve balances, including changing the heading to refer to “required reserve balances” and adding a new provision that prohibits earnings on other balances.
3Scope of allowed earnings: The bill clarifies that earnings may be paid only under the provisions of this paragraph, effectively restricting or eliminating earnings on excess reserve balances.
4Structural update: The subparagraphs within section 19(b)(12) are reorganized (with subparagraphs re-designated as needed) to accommodate the new prohibition.
5Status and sponsorship: Introduced in the House as H.R. 146 on January 3, 2025, attributed to Mr. Davidson and referred to the Committee on Financial Services; sponsor is not specified in the provided text.

Impact Areas

Primary group/area affected: Depository institutions (banks) and other entities holding reserves at the Federal Reserve; the removal of IOER changes their incentive to hold large amounts of excess liquidity.Secondary group/area affected: Federal Reserve System (monetary policy operations and its balance sheet), money markets, and liquidity management practices of banks.Additional impacts: Potential effects on short-term interest rates and the floor mechanism for policy rates (IOER historically helps set a floor for the federal funds rate). Banks and market participants might adjust funding and liquidity strategies; the Fed’s interest expense and overall monetary policy toolkit could be affected. The broader impact on consumers and lending conditions would be indirect and depend on subsequent market and policy responses.

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