Reserve Account

Noninterest earning balance that Depository financial institutions maintain with a Federal Reserve Bank or with a Correspondent bank to satisfy the Fed's Reserve Requirements. Aside from their value to the Fed when it implements its Monetary Policy objectives, reserve account balances play a central role in the exchange of funds between depository institutions. Large dollar-value payments between financial institutions are processed through the Federal Reserve Communication System, also known as Federal Wire or Fed Wire, which routinely handles a daily volume exceeding $500 billion. These interbank transfers are made from reserve accounts. Banks with excess balances in a reserve account-balances greater than the required ratio of reserves to transaction account deposits-routinely sell these excess balances, known as Federal Funds or Fed Funds, in the short-term Money Market to get a higher yield on temporarily idle balances. Fed Funds usually are sold on an overnight basis and are due back at the start of business the next day. Banks that have Fed Funds to sell generally are community banks with relatively low loan growth; buyers of Fed Funds typically are large regional or money center banks whose demand for short-term capital often exceeds their deposit liabilities. See also Borrowed Reserves; Contemporaneous Reserves; Excess Reserves; Reserve Ratio; Total Reserves.