(Answered) Why did the Fed start paying interest on reserve balances?Why did the Fed start paying interest on…

➤ How does paying interest on reserves affect bank lending and liquidity?
Paying interest raises the opportunity cost of lending for some banks, so it can reduce marginal lending incentives. Lending also depends on loan demand, capital, and credit risk. At the same time, interest on reserves improves liquidity management and reduces stress in short-term funding markets.