Donald Kohn delivered testimony before the Senate Committee on Homeland Security and Governmental Affairs on December 11, 2025, addressing the Federal Reserve’s practice of paying interest on bank reserves. Kohn, who previously advocated for this policy in 2004 as a member of the Federal Reserve Board of Governors, reiterated its importance in supporting effective monetary policy and financial stability. n nAt the time of his earlier testimony, Kohn argued that failing to compensate banks for holding reserves amounted to an implicit tax, effectively requiring them to extend interest-free loans to the government. Congress eventually agreed with this assessment and authorized the payment of interest on reserves through the Regulatory Relief Act of 2006. Although the provision was initially set to take effect in 2011, it was accelerated to 2008 to assist the Federal Reserve in stabilizing financial markets during the Global Financial Crisis. n nAccording to Kohn, the Interest on Reserve Balances (IORB) mechanism serves multiple public policy objectives. It enables the central bank to fulfill its dual mandate of promoting price stability and maximum employment, particularly in times of economic stress. Additionally, it contributes to the resilience of the financial system by providing a tool to manage short-term interest rates effectively. n nHe emphasized that if policymakers wish to impose additional costs on banks, such measures should be implemented transparently through the tax code rather than through indirect mechanisms like withholding interest on required deposits. n nIn his latest appearance, Kohn outlined the benefits of IORB and responded to criticisms that have emerged over time, reinforcing the argument that the policy remains a cornerstone of modern monetary operations. n
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Donald Kohn’s testimony on interest on bank reserves held at the Federal Reserve
The following testimony was given at a hearing of the Senate Committee on Homeland Security and Governmental Affairs on December 11, 2025. n nDonald Kohn previously testified on this subject in 2004, as a member of the Board of Governors of the Federal Reserve, in favor of allowing the Federal Reserve to pay interest on the deposits that banks held at the Federal Reserve. He argued then that not paying interest on these deposits was, in effect, a tax on banks, forcing them to make interest-free loans to the government. n nCongress ultimately agreed that the tax induced unnecessarily wasteful and harmful actions, and so it authorized the payment of interest on reserves in the Regulatory Relief Act of 2006; this legislation also included additional flexibility for the Board of Governors to reduce reserve requirements. The authorization to pay interest was scheduled to take effect in 2011, but Congress sped up its implementation to 2008 to facilitate the Federal Reserve’s actions to stabilize financial markets and the economy during and after the Global Financial Crisis of 2008-09. n nAccording to Kohn, the payment of interest on reserve balances (IORB) serves several critical public policy purposes: It enables the Federal Reserve to meet its Congressional monetary policy mandates for stable prices and maximum employment in some circumstances, and it enhances financial stability. If Congress wishes to raise additional taxes from banks, it should do so directly, not by forcing them to make interest-free loans to the government. n nIn his testimony, he explains the positive benefits of IORB and address some of the criticisms that have been leveled against it.