Third, federal funds borrowed have historically been distinguished from other liabilities of depository institutions because they have been exempt from both reserve requirements and interest rate ceilings. 2 The supply of and demand for federal funds arise in large part as a means of efficiently distributing reserves throughout the banking system. On any given day, individual depository institutions may be either above or below their desired reserve positions. Reserve accounts bear no interest, so banks have an incentive to lend reserves beyond those required plus any desired excess. Banks in need of reserves.
