or negative levels given the increased level of reserve balances. interest on reserves represents the rate of return on a riskless overnight deposit at the fed. 7 accordingly, the interest rate paid on reserves represents the sure return a bank can earn and therefore the opportunity cost for the bank to make an alternative investment, such as a loan or the purchase of a security. theoretically, if all money market participants had access to deposits earning the ioer rate, the ioer rate should set a minimum rate – or floor, so to speak – on short - term interest rates, as there would be no incentive for institutions to make loans to any institution at a lower rate. even in a market without universal access to ioer, depository institutions with access to it could borrow funds or take deposits from institutions that cannot earn it, then leave funds invested at the ioer rate until there ’ s no further economic advantage to borrower or lender. competition among banks that can earn ioer would thus pull up other money market rates close to the ioer rate. money market dynamics in recent years generally reflect these changes. in a world with significantly elevated reserve balances and a ¼ percent interest rate paid on those balances, ioer has kept the federal funds rate and other money market rates at positive levels within the fomc ’ s zero to ¼ percent target range. contrary to the dynamics one would expect of an idealized perfect market, however, short - term rates have consistently traded at levels below the ioer rate, and treasury bill and repo rates have occasionally gone negative, particularly when financial stresses increase the demand for very safe assets. since ioer is available only to depository institutions holding balances at the fed, many other money market participants cannot access it, either because they don ’ t earn interest on fed account balances ( like government - sponsored enterprises, or gses ) or don ’ t have fed accounts at all ( like money market funds ). without such access, these institutions may have less bargaining power and may have to leave funds unremunerated at the fed or place funds in the market at sub - ioer rates. this creates a potential arbitrage opportunity for banks, which can earn a spread between their costs of funds and their earnings on reserves, but not for other cash lenders. however, uncertain or rising balance sheet costs – likely related to new regulatory changes, including higher capital requirements, leverage ratio and liquidity requirements, and changes in the fdic ’

finance their see my november 27, 2012, remarks on the role of central bank interactions with financial markets. the federal reserve also established a baseline demand for reserves through reserve requirements. since the expansion of the federal reserve ’ s balance sheet and resultant increase in reserve levels, however, these requirements have been so far below the level of actual reserves that they can be met without any additional desk actions. bis central bankers ’ speeches inventories of securities, frequently borrowing from cash - rich investors, such as money market funds. these financing arrangements are structured as repos, in which the security is technically sold with an agreement to repurchase at an agreed - upon later date. the transaction can be thought of in most respects as economically similar to a collateralized loan. the growth of the gc repo market in recent decades has reflected the greater issuance of marketable securities in the united states, and the repo market and the broker - dealers, through their intermediation, support the healthy functioning of the markets for such securities. primary dealers have accounts at the tri - party clearing banks, which are depository institutions. thus, by crediting funds to the dealers ’ clearing accounts, the desk literally created reserve balances in the banking system. these operations didn ’ t attempt to exert any influence directly over the repo markets in which we transacted, and in fact the repo operations were conducted as fixed - quantity auctions in which the desk took whatever rates the market offered to achieve the targeted amount of repos. the related adjustments in reserve conditions directly influenced the rate in the fed funds market used by banks to borrow reserves to meet reserve requirements and ensure adequate clearing balances for payments activity. the fed funds rate, in turn, had strong linkages to other short - term interest rates, thus allowing the fomc to affect the broad level of short - term interest rates even through its narrow policy target. although there might have been relatively small deviations across various short - term money markets, movements were generally aligned, and we retained firm control over short - term interest rates. the desk ’ s effectiveness in achieving the fomc ’ s fed funds target through operations with primary dealers in the repo market thus illustrates how its operations are just a technical means to an end. the crisis brought on several important changes in the conduct of monetary policy with implications for money markets. the first was the easing in the stance of monetary policy, with the fomc ’ s reduction in