 Depository institutions in the US are subject to reserve requirements, regulations set by the Board of Governors of the Federal Reserve which oblige banks to keep a specified amount of funds (reserves) in their accounts at the Fed as insurance against deposit outflows and other balance sheet fluctuations.It is common for banks to end up with too many or too few reserves in their accounts at the Fed.Up until October 2008, banks had the incentive to lend out idle funds since the Fed did not pay interest on excess reserves

The interest rate channel of monetary policy refers to the effect of monetary policy actions on interest rates that influence the investment and consumption decisions of households and businesses.