What were the benefits of creating ON RRP (versus expanding the availability of IOR)?

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

From the St. Louis Fed, 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.

1 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.

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

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