<p>Some banks are &quot;non-member banks&quot;. A non-member bank is not subject to the requirements of a member bank of the Federal Reserve system.</p>
<p><a href="https://www.jstor.org/stable/2326853" rel="nofollow noreferrer">Here is a link to a reference from the Journal of Finance, June 1975.</a></p>
<p>It says reserve requirements for nonmember banks are less onerous and reporting requirements for nonmember banks in most states are &quot;less restrictive&quot;.</p>

CC BY-SA 4.0
2022-08-21T00:10:17.100Z
Ok, but why introduce ON RRP if they could just let more institutions access fed accounts?  And why securities?
tattarrattat
CC BY-SA 4.0
2022-08-21T00:49:52.587Z
@tattarrattat  It is less onerous for a bank to not have a Fed account.
H2ONaCl
CC BY-SA 4.0
2022-08-21T04:01:49.997Z
We're talking about hundreds of millions of dollars here resulting in significant interest for the organizations to reap, not to mention that many of these organizations are themselves government entities.  If they could choose, they would ask for IOR rates, but it is not their decision, it is a fed decision.  Thus the question.
tattarrattat
CC BY-SA 4.0
2022-08-21T22:34:13.743Z
I think you are assuming there was a huge difference between the FFR that a non-member bank can earn and the IOR rate that a member can earn. Obviously there was some difference which motivated the introduction of reverse repo to a "broad set" of institutions but now with reverse repo the difference would be smaller.
H2ONaCl
CC BY-SA 4.0
2022-08-21T23:00:15.543Z
No, I'm not.  My question assumes what you just wrote ("there was some...smaller.") and follows from it.  Namely why choose a reverse repo?  What benefits/risks does it entail when the Fed could have easily given them bank accounts with a lower rate of interest than the IOR and called it a day.
tattarrattat
CC BY-SA 4.0
2022-08-22T02:34:56.137Z
@tattarrattat Have a look at the link. I can't easily quote it because copy and paste doesn't work on bitmaps but it comes down to non-member banks choosing to be non-member banks.
H2ONaCl
CC BY-SA 4.0
2022-08-22T02:59:51.037Z
Ok, it says, "the reporting requirements for nonmember banks in most states are less restrictive than those for member banks," and that does relate to banks.  But... "MMFs cannot hold balances in a Fed account; however, MMFs have access to the ON RRP facility (MMFs with ON RRP access accounted for approximately 80 percent of MMF assets under management at the end of 2021)." according to https://libertystreeteconomics.newyorkfed.org/2022/04/the-feds-balance-sheet-runoff-and-the-on-rrp-facility/  and there are trillions in MMFs.
tattarrattat
CC BY-SA 4.0
2022-08-22T03:06:02.323Z
Also, reserve requirements are zero, so if you take that out it will be a more currently accurate answer.  And thank you.
tattarrattat
CC BY-SA 4.0
2022-08-21T00:00:05.617Z
2022-08-21T00:00:05.617Z
H2ONaCl
<p>I'm not understanding why the Fed decided to introduce their Overnight Reverse Repo Facility (ON RRP).</p>
<p>From the <a href="https://www.stlouisfed.org/open-vault/2020/august/how-does-fed-influence-interest-rates-using-new-tools" rel="nofollow noreferrer">St. Louis Fed</a>, it helps to provide a floor for the Federal Funds Rate (FFR), a market-determined rate at which banks lend to one another.</p>
<blockquote>
<p>Not every financial institution that operates in the federal funds market has access to interest on reserves. So, the FFR could fall below the setting of the Interest of Reserves (IOR) rate.</p>
</blockquote>
<blockquote>
<p>To aid in the control of the level of the FFR, the Fed introduced the overnight reverse repurchase agreement (ON RRP) facility to a broad set of financial institutions.</p>
</blockquote>
<p>Another option seems to be simple, giving more institutions accounts at fed banks, allowing them to also get IOR.  Or even allow them accounts, but do not give them the same interest as depository institutions.</p>
<p>Further, ON RRP is no longer cash, so there must be use for the Fed to be ridding themselves of Treasuries overnight, but it's not clear why.</p>

<monetary-policy><federal-reserve><fed-funds-rate>
What were the benefits of creating ON RRP (versus expanding the availability of IOR)?
tattarrattat
# What were the benefits of creating ON RRP (versus expanding the availability of IOR)?

(Asked by: username_0 on 2022-08-20)

I'm not understanding why the Fed decided to introduce their Overnight Reverse Repo Facility (ON RRP).

From the [St. Louis Fed](https://www.stlouisfed.org/open-vault/2020/august/how-does-fed-influence-interest-rates-using-new-tools), it helps to provide a floor for the Federal Funds Rate (FFR), a market-determined rate at which banks lend to one another.

> Not every financial institution that operates in the federal funds market has access to interest on reserves. So, the FFR could fall below the setting of the Interest of Reserves (IOR) rate.

> To aid in the control of the level of the FFR, the Fed introduced the overnight reverse repurchase agreement (ON RRP) facility to a broad set of financial institutions.

Another option seems to be simple, giving more institutions accounts at fed banks, allowing them to also get IOR. Or even allow them accounts, but do not give them the same interest as depository institutions.

Further, ON RRP is no longer cash, so there must be use for the Fed to be ridding themselves of Treasuries overnight, but it's not clear why.

**Tags:** monetary-policy, federal-reserve, fed-funds-rate


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## 1 answers

### Answer by username_1 on 2022-08-21. Score: 1 | Accepted answer

Some banks are "non-member banks". A non-member bank is not subject to the requirements of a member bank of the Federal Reserve system.

[Here is a link to a reference from the Journal of Finance, June 1975.](https://www.jstor.org/stable/2326853)

It says reserve requirements for nonmember banks are less onerous and reporting requirements for nonmember banks in most states are "less restrictive".

> **Comments:**
> **username_0**: Ok, but why introduce ON RRP if they could just let more institutions access fed accounts?  And why securities?  
> **username_1**: @username_0  It is less onerous for a bank to not have a Fed account.  
> **username_0**: We're talking about hundreds of millions of dollars here resulting in significant interest for the organizations to reap, not to mention that many of these organizations are themselves government entities.  If they could choose, they would ask for IOR rates, but it is not their decision, it is a fed decision.  Thus the question.  
> **username_1**: I think you are assuming there was a huge difference between the FFR that a non-member bank can earn and the IOR rate that a member can earn. Obviously there was some difference which motivated the introduction of reverse repo to a "broad set" of institutions but now with reverse repo the difference would be smaller.  
> **username_0**: No, I'm not.  My question assumes what you just wrote ("there was some...smaller.") and follows from it.  Namely why choose a reverse repo?  What benefits/risks does it entail when the Fed could have easily given them bank accounts with a lower rate of interest than the IOR and called it a day.  
> **username_1**: @username_0 Have a look at the link. I can't easily quote it because copy and paste doesn't work on bitmaps but it comes down to non-member banks choosing to be non-member banks.  
> **username_0**: Ok, it says, "the reporting requirements for nonmember banks in most states are less restrictive than those for member banks," and that does relate to banks.  But... "MMFs cannot hold balances in a Fed account; however, MMFs have access to the ON RRP facility (MMFs with ON RRP access accounted for approximately 80 percent of MMF assets under management at the end of 2021)." according to https://libertystreeteconomics.newyorkfed.org/2022/04/the-feds-balance-sheet-runoff-and-the-on-rrp-facility/  and there are trillions in MMFs.  
> **username_0**: Also, reserve requirements are zero, so if you take that out it will be a more currently accurate answer.  And thank you.  

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