What Is the Reserve Maintenance Period?
The reserve maintenance period is the length of time during which the Federal Reserve requires banks and other depository institutions to maintain a specified level of funds. The standard reserve period is two weeks in length, beginning on a Thursday and ending on a Wednesday.
The Federal Reserve set the reserve requirement to zero in March 2020 as one of several measures intended to free up liquidity and encourage new lending to consumers and businesses during the COVID-19 pandemic. The move essentially eliminated the reserve requirement.
- The cash reserve requirement for banks was set at zero in March 2020 to free up liquidity and keep money moving to consumers and businesses through the COVID-19 crisis.
- The Federal Reserve had already decided that the reserve requirements were no longer needed.
- In fact, according to the Federal Reserve, banks have built up their reserves beyond the requirements,
Understanding the Reserve Maintenance Period
The Federal Reserve has stated that it has no plans to reinstate reserve requirements.
The agency announced it was eliminating the reserve requirement In a statement released on March 15, 2020, just as the COVID-19 pandemic was taking hold in the U.S. The Fed explained that the nation's banking institutions had "built up substantial levels of capital and liquidity" in excess of the government's reserve numbers ever since the 2007-2008 financial crisis.
The action was one of several taken by the Fed to encourage lenders to keep the money flowing to consumers and businesses through the COVID-19 crisis.
The agency also noted that it had already decided to begin implementing an "ample reserves regime" in order to free up liquidity in the banking system.
How the Reserve Maintenance Period Worked
The Federal Reserve set the minimum reserve balance requirement for each bank, basing the reserve number on the amount of business that the bank normally undertakes.
The amount of the required reserve fund changed regularly. Most banks keep some of their reserve cash on-site in their vaults for day-to-day use and the rest in a regional Federal Reserve vault or at another depository institution.
To calculate whether a bank was meeting its reserve requirement, the Fed used the average of all the end-of-day balances of that institution's master account throughout the reserve maintenance period. That gave the bank the leeway to fall below the required reserve on a given day without incurring a penalty.
Banks keep much of their cash reserves offsite in accounts at regional Federal Reserve facilities or in another bank with which it has an arrangement. Eligible correspondent banks include National Credit Union Administration Central Liquidity Facilities, Federal Home Loan Banks, depository institutions, or banking Edge Act and Agreement corporations with a master account at a Federal Reserve Bank.
Monitoring the Reserve Requirements
The Federal Reserve maintained a penalty-free band that allowed banks some flexibility in handling their cash.
Banks that maintained their reserve balances directly at Federal Reserve banks were required to maintain an average balance that is at least equal to the bottom threshold of the band. That minimum is $50,000 or 10 percent of the institution’s reserve balance requirement, whichever amount is greater.