[Federal Register Volume 76, Number 201 (Tuesday, October 18, 2011)]
[Proposed Rules]
[Pages 64250-64259]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26770]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 /
Proposed Rules
[[Page 64250]]
FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Regulation D; Docket No. R-1433]
RIN No. 7100 AD 83
Reserve Requirements of Depository Institutions: Reserves
Simplification and Private Sector Adjustment Factor
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking; request for public comment.
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SUMMARY: The Board is requesting public comment on proposed amendments
to Regulation D, Reserve Requirements of Depository Institutions, to
simplify the administration of reserve requirements. The proposed
amendments would create a common two-week maintenance period for all
depository institutions, create a penalty-free band around reserve
balance requirements in place of carryover and routine penalty waivers,
discontinue as-of adjustments related to deposit revisions, replace all
other as-of adjustments with direct compensation, and eliminate the
contractual clearing balance program. The proposed amendments are
designed to reduce the administrative and operational costs associated
with reserve requirements for both depository institutions and the
Federal Reserve. The Board is requesting comment on all aspects of the
proposal. In connection with the proposed elimination of the
contractual clearing balance program, the Board is requesting comment
on several issues related to the methodology used for the Private
Sector Adjustment Factor that is part of the pricing of Federal Reserve
Bank services.
DATES: Comments must be submitted by December 19, 2011.
ADDRESSES: You may submit comments, identified by Docket No. R-1433 and
RIN No. 7100 AD 83, by any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information.
Public comments may also be viewed electronically or in paper in
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.)
between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Kara Handzlik, Senior Attorney (202)
452-3852, Legal Division, or Margaret Gillis DeBoer, Assistant Director
(202) 452-3139, or Heather Wiggins, Senior Financial Analyst (202) 452-
3674, Division of Monetary Affairs, or, for questions regarding the
Private Sector Adjustment Factor, Gregory Evans, Deputy Associate
Director (202) 452-3945, or Brenda Richards, Manager (202) 452-2753,
Division of Reserve Bank Operations and Payment Systems; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869; Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
I. Background
Section 19 of the Federal Reserve Act (Act) \1\ authorizes the
Board of Governors of the Federal Reserve System (Board) to impose
reserve requirements on certain deposits and other liabilities of
depository institutions for the purpose of implementing monetary
policy. The Board's Regulation D (Reserve Requirements of Depository
Institutions, 12 CFR part 204) implements section 19 of the Act.
Transaction account balances maintained at each depository institution
are subject to reserve requirement ratios of zero, three, or ten
percent, depending on the level of transaction accounts at that
institution.\2\ The reserve requirement ratios are set by the Board
within the limits mandated by the Act. A depository institution
satisfies its reserve requirement by its holdings of vault cash and, if
vault cash is insufficient to meet the requirement, by a balance
maintained in an account at a Federal Reserve Bank (Reserve Bank). The
amount of balances that an institution must maintain if its reserve
requirement is not satisfied by vault cash is referred to as the
reserve balance requirement. The balance that an institution maintains
to satisfy its reserve balance requirement can be maintained either in
the institution's own account at a Reserve Bank or in a pass-through
correspondent's Reserve Bank account. In 2008, Congress amended the
Federal Reserve Act to authorize the Reserve Banks to pay interest on
balances of eligible institutions.\3\ Since then, interest has been
paid on balances maintained to satisfy reserve balance requirements at
a rate determined by the Board (currently 25 basis points).\4\
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\1\ 12 U.S.C. 461.
\2\ 12 CFR 204.4(f) (reserve requirement ratios).
\3\ Emergency Economic Stabilization Act of 2008, Pub. L. 110-
343, Sec. 128, 122 Stat. 3765 (2008).
\4\ 12 CFR 204.10(b) (rates of interest paid on balances
maintained by eligible institutions at Reserve Banks).
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An institution may also maintain a clearing balance to satisfy its
contractual clearing balance requirement pursuant to an agreement
between the institution and its Reserve Bank. Clearing balances
currently generate earning credits, a form of compensation that can be
used only to offset service charges an institution incurs through its
use of Federal Reserve priced services (earnings credits currently are
computed as 80 percent of the rolling 13-week average of the three-
month Treasury bill rate). An institution may also maintain excess
balances, which are balances held in excess of the balance maintained
to satisfy the reserve balance requirement and the contractual clearing
balance requirement, in its account at a Reserve Bank. Like balances
maintained to satisfy the
[[Page 64251]]
reserve balance requirement, since 2008, interest has been paid on
excess balances at a rate determined by the Board (currently 25 basis
points).
II. Overview of Proposed Simplifications
The Board is proposing four amendments to Regulation D that would
simplify the administration of reserve requirements while maintaining
the role of reserve requirements in the implementation of monetary
policy. The Board believes that these four simplifications will reduce
the administrative and operational costs associated with reserve
requirements for depository institutions, Reserve Banks, and the Board:
1. Create a common two-week maintenance period for all depository
institutions;
2. Create a penalty-free band around reserve balance requirements
in place of using carryover and routine penalty waivers (routine
penalty waivers are used to eliminate charges for small or infrequent
reserve deficiencies);
3. Discontinue as-of adjustments related to deposit revisions and
replace all other as-of adjustments with direct compensation; and
4. Eliminate the contractual clearing balance program.
The Board also proposes to make certain changes to various terms used
throughout Regulation D in order to clarify the meaning, enhance the
accuracy, and ensure the consistent application of those terms. The
proposed changes include replacing the term ``required reserve
balance'' with ``balances maintained to satisfy the reserve balance
requirement,'' adding a new definition of ``reserve balance
requirement,'' and making conforming revisions throughout the
regulation.
Upon the Board's adoption of final amendments to Regulation D and
the Private Sector Adjustment Factor calculation, related Federal
Reserve operating circulars and manuals will be updated accordingly.
1. Create a Common Two-Week Maintenance Period for All Depository
Institutions
As noted above, a depository institution may satisfy its reserve
balance requirement by maintaining a balance in its own account at a
Reserve Bank or in a pass-through correspondent's Reserve Bank account.
A depository institution satisfies its reserve balance requirement on
average over a period of time, known as a maintenance period.
Maintenance periods provide depository institutions flexibility,
allowing them to meet their reserve balance requirements on average
over a period of time rather than on a daily basis.
Regulation D currently provides for two types of maintenance
periods, a one-week maintenance period and a two-week maintenance
period.\5\ To determine which reserve maintenance period applies to an
institution, the Board requires depository institutions to submit
deposit reports at different frequencies depending on the amount of
their reservable liabilities over the preceding year.\6\ The Board
assigns depository institutions annually to one of four deposit
reporting categories (weekly reporters, quarterly reporters, annual
reporters, or nonreporters). Depository institutions that have
reservable liabilities above the exemption amount \7\ and therefore
have non-zero reserve requirements are required to submit deposit data
at a weekly or quarterly frequency. Of these institutions, those with
the sum of transaction accounts, savings deposits, and small time
deposits above a certain threshold are required to report weekly and
those with the sum of transaction accounts, savings deposits, and small
time deposits below the threshold are required to report quarterly.
Weekly reporters are subject to a two-week maintenance period and
quarterly reporters are subject to a one-week maintenance period.
Institutions that have reservable liabilities below the exemption
amount (and therefore have a zero reserve requirement) either report
annually or are not required to report at all. Annual reporters and
nonreporters with a contractual clearing balance are subject to a one-
week maintenance period and, as explained above, receive earnings
credits on their clearing balances rather than interest payments.
Institutions that have neither reserve requirements nor clearing
balance requirements receive interest payments on their average
balances over a one-week period at the excess balance rate.
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\5\ 12 CFR 204.5(b) (maintenance periods). Prior to 1984, all
depository institutions satisfied their reserve requirements using a
common maintenance period of one week with a lag (``lagged reserve
requirements''). Under lagged reserve requirements, the amount of
reserves required to be maintained over the maintenance period was
calculated based on deposit levels reported during a previous time
period. In 1984, however, the Federal Reserve shifted to a framework
of contemporaneous reserve requirements. Under contemporaneous
reserve requirements, the deposit reporting period and the reserve
maintenance period for depository institutions that reported their
deposits weekly overlapped significantly. At that time, the Board
lengthened the maintenance period for these depository institutions
to two weeks in order to provide additional flexibility in meeting
reserve requirements. In 1998, the Board returned to the lagged
reserve requirements framework, but there was no corresponding
change back to a common weekly maintenance period. Accordingly,
since 1998, depository institutions that report their deposits
weekly have continued to have a two-week maintenance period, while
quarterly reporters have continued to have a one-week maintenance
period.
\6\ 12 U.S.C. 248(a) (authorizing the Board to require reports
of liabilities and assets from depository institutions to enable the
Board to conduct monetary policy).
\7\ The exemption amount is the amount of an institution's
reservable liabilities that is subject to a zero-percent reserve
requirement. Cf. 12 CFR 204.4(f) (setting forth exemption amount).
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From one year to another, some depository institutions switch
reporting frequency because of changes in the levels of the
institution's reservable liabilities. Specifically, some depository
institutions may switch from a two-week maintenance period to a one-
week maintenance period, or vice versa. In certain instances,
depository institutions that become eligible to shift to a quarterly
instead of weekly reporting frequency elect to remain at the higher
reporting frequency in order to maintain the flexibility of satisfying
reserve requirements over a two-week maintenance period instead of a
one-week maintenance period.
Under the Board's proposal, all depository institutions would be
subject to a two-week maintenance period. This proposal would benefit
depository institutions, Reserve Banks, and the Board in several ways.
It would (1) Provide greater flexibility to depository institutions
that currently satisfy reserve balance requirements over a one-week
maintenance period; (2) reduce unnecessary complexity in the existing
maintenance period structure; (3) reduce administrative and operational
costs for depository institutions that may otherwise have had to change
maintenance periods when deposit reporting categories (and therefore
length of maintenance period) changed; and (4) reduce the operational
and administrative cost for Reserve Banks and the Board by eliminating
business processes and controls associated with maintaining two
maintenance periods.
The creation of a common two-week maintenance period would not
impede the conduct of monetary policy. Indeed, it is likely that the
two-week maintenance period would enable those depository institutions
currently subject to a one-week maintenance period to accommodate more
easily unexpected conditions in the Federal funds market because of the
longer period of time over which they would be able to manage their
reserve positions.
The Board's proposal would not increase the reporting burden on
depository institutions that currently have a two-week maintenance
period. In addition, for those depository institutions mentioned above
that elect
[[Page 64252]]
to remain weekly reporters to maintain the flexibility of satisfying
reserve requirements over a two-week maintenance period instead of a
one-week maintenance period, the burden could be reduced, as these
institutions could move to a quarterly reporting frequency and still
maintain the flexibility of satisfying reserve requirements over a two-
week maintenance period. Depository institutions that currently have a
one-week maintenance period would have greater flexibility to manage
reserve balances over a longer time period; it would not be necessary
for such depository institutions to change their internal systems, as
they could continue to satisfy their requirement weekly, if desired,
within the two-week maintenance period.
Implications for Deposit Data Reporting
For depository institutions that report their deposits weekly, the
relationship between the weekly reporting periods and the two-week
maintenance period would be maintained. For depository institutions
that report their deposits quarterly, the quarterly reporting periods
will not change but a new relationship is being proposed to link these
quarterly reporting periods to two-week maintenance periods.\8\ The
Board proposes that each quarterly report be used to calculate the
reserve requirement for an interval of either six or seven consecutive
two-week maintenance periods, depending on when the interval begins and
ends. The interval will begin on the fourth Thursday following the end
of each quarterly reporting period if that Thursday is the first day of
a two-week maintenance period. If the fourth Thursday following the end
of a quarterly reporting period is not the first day of a two-week
maintenance period, then the interval will begin on the fifth Thursday
following the end of the quarterly reporting period. The interval will
end on the fourth Wednesday following the end of the subsequent
quarterly reporting period if that Wednesday is the last day of a two-
week maintenance period. If the fourth Wednesday following the end of
the subsequent quarterly reporting period is not the last day of a two-
week maintenance period, then the interval will conclude on the fifth
Wednesday following the end of the subsequent quarterly reporting
period.
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\8\ The Board currently provides quarterly reporters with
reserve maintenance calendars that link quarterly reporting periods
to a group of one-week maintenance periods. See http://www.frbservices.org/centralbank/reservescentral/index.html#rmc. If
the Board adopts the proposed amendments to Regulation D in final
form, these reserve maintenance calendars will be updated
accordingly.
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The Board seeks comment on the costs and benefits associated with
the proposal to create a common two-week maintenance period. The Board
also seeks comment on whether there may be a particular benefit to a
one-week common maintenance period rather than the proposed two-week
common maintenance period. The Board further seeks comment on possible
operational difficulties in transitioning to a two-week maintenance
period for those depository institutions that currently have a one-week
maintenance period.
2. Create a Penalty-Free Band Around Reserve Balance Requirements in
Place of Carryover and Routine Penalty Waivers
Currently, Regulation D requires a depository institution to
satisfy its reserve balance requirement on average over that depository
institution's maintenance period. A depository institution that has a
modest deficiency in its balance maintained to satisfy the reserve
balance requirement over a given maintenance period (that is, the
institution has maintained on average over the maintenance period a
balance that is lower than the amount of its reserve balance
requirement) is currently allowed to make up that deficiency in the
subsequent maintenance period by holding a higher level of balances.\9\
Similarly, a depository institution that has a modest excess of
balances maintained to satisfy its reserve balance requirement over a
maintenance period is allowed to use that excess to satisfy its reserve
balance requirement in the next maintenance period, thereby permitting
it to hold a lower average balance over the next maintenance period.
The ability to carry a deficiency or excess from one maintenance period
over to the next is referred to as ``carryover.''
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\9\ 12 CFR 204.6(a).
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Carryover was designed to provide depository institutions
flexibility in satisfying their reserve balance requirements.
Specifically, carryover permits a depository institution to utilize a
portion of its excess balances from the current period to satisfy
reserve requirements in the subsequent period and thereby avoid having
to sell excess funds into the Federal funds market in the event it has
more balances than it needs to satisfy its reserve balance requirement.
Similarly, within limits, carryover allows a depository institution
that does not have sufficient balances to satisfy its reserve balance
requirement in the current period to meet a portion of that requirement
in the subsequent period and thereby avoid having to increase
borrowings in the Federal funds market to avoid a current period
deficiency. Either one of these situations could produce sharp swings
in market interest rates. Because carryover allows depository
institutions to apply one maintenance period's excess or deficiency to
the subsequent maintenance period, carryover necessarily links one
maintenance period to its successor. As a result, one generally cannot
determine for a given maintenance period whether a depository
institution has satisfied its reserve balance requirement, or is in an
excess or deficient position, until the completion of the subsequent
maintenance period. Consequently, Reserve Banks must delay the payment
of interest on eligible institutions' balances for at least one
maintenance period, in order to calculate the amount and the type of an
institution's balances.
Regulation D currently authorizes Reserve Banks to assess charges
against depository institutions that fail to satisfy their reserve
balance requirements.\10\ Regulation D also authorizes Reserve Banks to
waive the imposition of these charges except when the deficiency
``arises out of a depository institution's gross negligence or conduct
that is inconsistent with the principles and purposes of reserve
requirements.'' \11\ Regulation D further provides that these ``routine
penalty waivers'' are based on ``an evaluation of the circumstances in
each individual case and the depository institution's reserve
maintenance record.'' \12\ Prior to 2008, reserve balance requirements
imposed an implicit tax on depository institutions because it forced
depository institutions to hold non-interest-bearing balances at
Reserve Banks when those funds could have been invested elsewhere for a
return. Because of this implicit tax, depository institutions had an
incentive to keep the level of the balances in their Reserve Bank
accounts as close as possible to their reserve balance requirements.
The ``routine waiver'' provision of Regulation D, permitting Reserve
Banks to waive the charge for small or infrequent deficiencies, was
designed to avoid punishing depository institutions that generally meet
their reserve balance requirements.\13\
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\10\ 12 CFR 204.6(a).
\11\ 12 CFR 204.6(b).
\12\ Id.
\13\ Infrequent deficiencies cannot exceed a certain percentage
of the depository institution's required reserves and can only occur
once during a two-year period.
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[[Page 64253]]
The Board is proposing to create a penalty-free band around each
depository institution's reserve balance requirement and to eliminate
the carryover and routine waiver provisions of Regulation D. Under the
proposal, the top of the penalty-free band would be defined as an
amount equal to an institution's reserve balance requirement plus a
dollar amount prescribed by the Board. Similarly, the proposal would
define the bottom of the penalty-free band as an amount equal to an
institution's reserve balance requirement less a dollar amount
prescribed by the Board. The dollar amount used to set the top and
bottom of the penalty-free band could be set as a fixed dollar amount,
specified as a percent of an institution's reserve balance requirement,
or as a combination of a fixed dollar amount and a percent of an
institution's reserve balance requirement. The dollar amounts
prescribed by the Board to determine the top and bottom of the penalty-
free band may differ from each other.
A depository institution that maintains balances that exceeded the
reserve balance requirement, but fell within the band, would be
remunerated at the interest rate paid on balances maintained to satisfy
the reserve balance requirement. Balances that exceeded the top of the
penalty-free band would be remunerated at the interest rate paid on
excess balances.\14\ A depository institution that maintains balances
below its reserve balance requirement would not be assessed a
deficiency charge unless the balances fell below the bottom of the
penalty-free band. The proposal would define a deficiency as the bottom
of the penalty-free band less the average balance held in an account at
a Reserve Bank by or on behalf of an institution over a maintenance
period. Under the proposal, Reserve Banks could pay interest on all
balances immediately following the close of a maintenance period.
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\14\ Under the proposal, the definition of ``excess balance''
would be amended to mean the average balance held in an account at a
Federal Reserve Bank by or on behalf of an institution over a
reserve maintenance period that exceeds the top of the penalty-free
band.
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The creation of a penalty-free band in place of carryover and
routine penalty waivers would not impede the conduct of monetary
policy. The administration of a penalty-free band would be more
straightforward than the complex rules surrounding the application of
carryover and routine penalty waivers. The elimination of these
features will make reserve administration more efficient and less
administratively burdensome and operationally complex for depository
institutions, Reserve Banks, and the Board, thereby supporting the
effective implementation of monetary policy. Reserve Banks would,
however, retain the authority to waive charges for deficiencies based
on an evaluation of the circumstances in each individual case.
Currently, the Reserve Banks pay interest on balances maintained to
satisfy reserve balance requirements at a rate designed to effectively
eliminate the opportunity cost of holding such balances. In general,
any interest rate paid on balances maintained to satisfy reserve
balance requirements reduces the opportunity cost of holding those
balances. If the interest rate set on balances used to satisfy reserve
balance requirements effectively eliminates the opportunity cost of
holding those balances, most depository institutions should in
principle be willing to hold any level of balances within the penalty-
free band. A depository institution could choose to hold an amount of
balances slightly below the reserve balance requirement and lend the
difference in the market; however, the additional interest earned would
be approximately offset by the reduced earnings from the Reserve Banks.
Similarly, a depository institution could choose to hold an amount
slightly higher than the reserve balance requirement and earn a greater
amount of interest from its balances at the Reserve Bank. This higher
amount of interest earned would be comparable to the foregone return of
investing these funds in the market.
The Board proposes to set the width of the penalty-free band to
approximate the flexibility in meeting reserve requirements that
carryover now provides. Under Regulation D currently, the amount an
institution can use for carryover into a subsequent maintenance period
is calculated as the greater of $50,000 or 4 percent of a depository
institution's total reserve requirement.\15\ The total reserve
requirement is the amount satisfied with both an institution's vault
cash and, if its vault cash is insufficient to satisfy the reserve
requirement, an institution's reserve balance requirement. The proposed
penalty-free band would be based on the reserve balance requirement,
not the total reserve requirement. For purposes of implementing
monetary policy and controlling the Federal funds rate, reserve balance
requirements are a more relevant quantity to consider than required
reserves. On average, reserve balance requirements are just under half
of total reserve requirements, that is, depository institutions
generally satisfy slightly less than half of reserve requirements with
reserve balances. The flexibility provided by the 4 percent carryover
provision, when expressed in terms of reserve balance requirements,
would equate to roughly 10 percent of the reserve balance requirement
for a typical depository institution. Establishing a $50,000 minimum
for the penalty-free band would preserve that degree of flexibility for
institutions with relatively low reserve balance requirements.
Therefore, the Board proposes setting the dollar amount used to
establish the top and bottom of the penalty-free band at the greater of
$50,000 or 10 percent of a depository institution's reserve balance
requirement. For pass-through correspondents, the Board proposes
setting the dollar amount used to establish the top and bottom of the
penalty-free band at an amount that is equal to the greater of $50,000
or 10 percent of the aggregate reserve balance requirement of the
correspondent (if any) and all of its respondents.
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\15\ 12 CFR 204.5(e).
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The Board expects that, if set this way, the width of the penalty-
free band would, for a typical depository institution, approximate the
flexibility in meeting reserve requirements that carryover currently
provides. The Board also expects, however, that there will be
depository institutions that are afforded less and more flexibility
under the proposal than they are currently afforded under the carryover
provision. For example, institutions that have reserve balance
requirements that are almost as large as their reserve requirement will
have greater flexibility under the proposal because their penalty-free
band will be bigger than their current carryover provision.
Institutions with very small reserve balance requirements relative to
their reserve requirements, on the other hand, will have less
flexibility because their penalty-free band will be smaller than their
current carryover provision. The Board seeks comment on what factors
the Board should consider in determining the appropriate size of the
penalty-free band, expressed either in dollars or as a percentage,
around a reserve balance requirement.
3. Discontinue As-of Adjustments Related to Deposit Revisions and
Replace All Other As-of Adjustments With Direct Compensation
As-of adjustments are currently used to offset the effect of errors
caused by the Federal Reserve and depository institutions, including
deposit reporting
[[Page 64254]]
errors, or to recover float incurred by an institution.
As-of Adjustments for Deposit Revisions
A depository institution is required to submit revisions to past
deposit reports to correct for reporting errors. When those revisions
result in a change in the depository institution's reserve balance
requirement, an as-of adjustment is used to correct the depository
institution's level of balances maintained. For example, if a reserve
balance requirement for a given period is revised upwards, the as-of
adjustment is used so that the depository institution must hold a
greater level of balances in a future maintenance period in order to
meet its reserve balance requirement.
The administration of as-of adjustments for deposit revisions
imposes a burden on depository institutions, Reserve Banks, and the
Board. Moreover, the Board believes that as-of adjustments for deposit
revisions are not necessary when the payment of interest on reserve
balances reduces or largely offsets the opportunity cost of holding
balances to satisfy reserve requirements. Consequently, the Board is
proposing to eliminate the use of as-of adjustments for deposit
revisions. Reports of deposits will continue to be used for the
calculation and publication of the monetary aggregates, and therefore
revisions to deposit reports would still be required to correct errors.
The payment of interest on balances maintained to satisfy reserve
balance requirements essentially eliminates the need for as-of
adjustments for deposit revisions. If a revision to a depository
institution's reservable liabilities lowers its reserve balance
requirement, the depository institution should have held a lower level
of balances to satisfy the lower reserve balance requirement prescribed
by the revised deposit data. Before the payment of interest on
reserves, holding a lower level of such balances would in principle
allow the institution to earn additional interest income by lending out
the balances. As-of adjustments in this case effectively compensated
the depository institution for this loss of investment income by
allowing the institution to hold lower reserve balances in a subsequent
period. However, because depository institutions are currently paid
interest on those balances at a rate approximately equal to the rate of
return that can be earned by lending out reserve balances, the
depository institution does not incur a loss as a result of the lower
reserve requirement after the fact and thus there is no need for an as-
of adjustment. Conversely, if a revision to a depository institution's
reservable liabilities increases its reserve balance requirement, the
depository institution should have held a higher level of balances to
satisfy the higher reserve balance requirement prescribed by the
revised deposit data. Holding the higher level of balances requires the
institution to forego the return it earned on lending those funds.
Before the payment of interest on reserves, as-of adjustments
effectively required the depository institution to surrender the
interest income gained from lending out balances by requiring the
institution to maintain higher balances in a subsequent period. But
because the Reserve Banks are currently paying interest on balances
maintained to satisfy reserve balance requirements at a rate designed
to effectively eliminate this opportunity cost, the depository
institution does not benefit from holding lower balances than required
based on the revised deposit data. As a result, there is again no need
for an as-of adjustment.
All As-of Adjustments Other Than Those Related to Deposit Revisions
As-of adjustments can also be used for a number of other purposes
including, but not limited to, the correction of transaction errors,
the recovery of float, and penalizing an institution for a reserve
deficiency in lieu of assessing monetary charges. An as-of adjustment
for a transaction-based error corrects the average level of balances
maintained by the depository institution to the level that would have
resulted had the error not occurred. Reserve Banks also issue as-of
adjustments to recover float that arises from an institution's request
to defer check and ACH charges for days in which the institution is
closed. Currently, a float pricing as-of adjustment or an explicit
billing charge to the institution's account is used to compensate the
Reserve Bank for the float created. In addition, Reserve Banks have the
ability to use as-of adjustments to penalize an institution for a
reserve deficiency rather than imposing monetary charges.
The Board is proposing that the income effects of all transaction-
based errors be corrected through direct compensation (that is, either
a debit or credit applied to an account to offset the effect of an
error). For float payments stemming from temporary closings of
institutions, the Board proposes that the recovery of float will be
made through an explicit billing charge and not with the issuance of
as-of adjustments. For as-of adjustments related to reserve
deficiencies, the Board is proposing to amend section 204.6(a) of
Regulation D to eliminate the ability to address reserve deficiencies
in any manner besides the assessment of charges.
Consistent with these proposals, elsewhere in the Federal Register
the Board is proposing conforming changes to the provisions in
Regulation J that refer to as-of adjustments.
As with the other proposed simplifications, the Board believes that
discontinuing as-of adjustments related to deposit revisions and
replacing all other as-of adjustments with direct compensation does not
affect the conduct of monetary policy. The Board is proposing to pay or
charge an institution based on the Federal funds rate. As a matter of
current practice, for other instances where Reserve Banks directly
compensate depository institutions, the amount compensated is based on
the Federal funds rate. The Board requests comment on whether use of
the Federal funds rate for the calculation of direct compensation is
appropriate, and if not, the rate that the Board should use.\16\
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\16\ With respect to Fedwire funds transfers, Sec.
210.32(b)(1)(ii) of Regulation J and Article 4A-506(b) provide that
if the amount of interest is not determined by an agreement or rule,
the applicable Federal funds rate would apply.
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4. Eliminate the Contractual Clearing Balance Program
Currently, a depository institution may voluntarily agree with a
Reserve Bank to maintain a level of balances in excess of the amount
necessary to satisfy its reserve balance requirement. This program,
known as the contractual clearing balance program, allows a Reserve
Bank and a depository institution to agree on a specific balance, known
as a contractual clearing balance, that the depository institution will
hold.\17\ The actual amount that a depository institution holds to
comply with this agreement is known as a clearing balance.\18\ Under
the contractual clearing balance program, Reserve Banks do not pay
explicit interest on clearing balances. Instead, clearing balances
generate earnings credits that a depository institution may then use to
pay for Reserve Bank priced services.
---------------------------------------------------------------------------
\17\ 12 CFR 204.2(x) (definition of contractual clearing
balance).
\18\ 12 CFR 204.2(v) (definition of clearing balance).
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Clearing balances were also initially implemented to provide
depository institutions that have low reserve balance requirements with
an incentive to hold a level of balances that will facilitate clearing
of payments and reduce the risk of an overdraft in their Reserve Bank
accounts. Earnings credits
[[Page 64255]]
earned on clearing balances can be used only to offset Federal Reserve
priced services fees within a 52-week period, after which the credits
expire. The interest rate used to calculate earnings credits is
currently 80 percent of the 13-week moving average of the yield on the
three-month Treasury bill.
The contractual clearing balance program was implemented to
replicate similar programs in the private sector. At that time, neither
Reserve Banks nor depository institutions were authorized to pay
explicit interest on balances maintained by eligible institutions. The
contractual clearing balance program permitted Reserve Banks to
compensate institutions in the form of earnings credits. The
contractual clearing balance program has also played a role in the
pricing of Reserve Bank services. Specifically, the level of clearing
balances is a significant factor in establishing the amount of imputed
costs that must be recovered by the Reserve Bank priced services fees,
as required by the Monetary Control Act of 1980.\19\
---------------------------------------------------------------------------
\19\ 12 U.S.C. 248a(c)(3).
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Currently, balances maintained to satisfy reserve balance
requirements and excess balances receive explicit interest, but
clearing balances do not. Reserve Banks currently pay explicit interest
on excess balances at a rate that is higher than the rate of implicit
interest currently paid on clearing balances. In addition, a depository
institution can use the explicit interest it receives on balances held
at a Reserve Bank for any purpose, including defraying the costs of
using Federal Reserve priced services. As a result, a depository
institution today that holds balances in excess of the amount necessary
to satisfy its reserve balance requirement would receive a higher
return by simply reducing its contractual clearing balance to zero,
redesignating its clearing balances as excess balances, and receiving
explicit interest on those balances at a higher rate. Consistent with
this interest rate differential, there has been a marked decrease in
the aggregate quantity of clearing balances maintained by depository
institutions since the introduction of the payment of explicit interest
on Reserve Bank account balances. Between the October 2008
implementation of the payment of interest on reserve balances and June
2011, the total level of clearing balances held by depository
institutions has decreased approximately $3.8 billion, from $6.5
billion to $2.7 billion.
The elimination of the contractual clearing balance program would
enhance the Federal Reserve's ability to carry out monetary policy by
eliminating the complexities associated with maintaining different
balance requirements for different kinds of balances and different
kinds and levels of interest rates (explicit and implicit).\20\ Since
2008, the explicit interest rates paid on balances maintained to
satisfy the reserve balance requirement and excess balances have become
an important tool for the conduct of monetary policy. Maintaining a
separate implicit interest rate paid on clearing balances under these
circumstances could interfere with clear communication of the stance of
monetary policy.
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\20\ The elimination of the contractual clearing balance program
would not have any effect on a Reserve Bank's ability to compel
account holders to maintain a minimum level of balances in order for
the Reserve Bank to protect itself from risk. See Reserve Bank
Operating Circulars at http://www.frbservices.org/regulations/operating_circulars.html.
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Under the proposal, the Board would amend Regulation D to remove
the definitions of ``clearing balance,'' ``clearing balance
allowance,'' and ``contractual clearing balance.'' The proposal would
also remove references to clearing balances and contractual clearing
balances elsewhere in Regulation D.
With the elimination of the contractual clearing balance program,
contractual clearing balance agreements would be terminated and Reserve
Banks would no longer issue earnings credits. Earnings credits issued
prior to the effective date of the termination would not be affected by
this proposal and would expire 52 weeks from their issue date if they
are not used. The proposed elimination of the contractual clearing
balance program may affect some depository institutions' internal
budgeting procedures, because they would need to begin paying for
Reserve Bank priced services explicitly, rather than implicitly through
the use of earnings credits. Also, a small number of institutions, such
as the Federal Home Loan Banks, are not eligible to earn explicit
interest on balances in their Reserve Bank accounts, but are eligible
to receive earnings credits under the contractual clearing balance
program. These institutions would lose the implicit interest from these
balances to pay for Reserve Bank services.
Because the level of clearing balances is a significant factor in
establishing the amount of imputed costs that must be recovered by
Reserve Bank priced services fees, the Board has been considering a
revised methodology for imputing those costs as clearing balances have
declined.\21\ In March 2009, the Board requested comment on a proposal
to replace the current ``correspondent bank model'' for imputing these
costs with a model based on publicly traded firms (``publicly traded
firm model'' or ``PTF model'').\22\ The PTF model proposed in 2009
would accommodate the proposed elimination of clearing balances and
would also recognize the shift in priced services' financial
characteristics and competitors away from correspondent banks. The PTF
model would instead compare the Federal Reserve's priced services to
the entire universe of U.S. publicly traded firms. Under the PTF model,
the imputed elements of priced services, such as the capital structure
and financing and tax rates, would be based on data for the U.S. market
as a whole rather than banking institutions. The Board is currently
considering the comments received on the proposed PTF model but has
maintained the correspondent banking model for 2010 and 2011 because
significant levels of clearing balances continue to exist.\23\
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\21\ The Monetary Control Act of 1980 requires that the Board
set fees for priced services provided to depository institutions by
the Reserve Banks to recover all direct and indirect costs of
providing these services over the long run. These costs include
those actually incurred as well as imputed costs, which include
financing costs, taxes, and certain other expenses, as well as the
return on equity (profit) that would have been earned by a private-
sector provider. 12 U.S.C. 248a(c)(3).
\22\ 74 FR 15481 (April 6, 2009).
\23\ See 74 FR 57472 (November 6, 2009) and 75 FR 67734
(November 3, 2010).
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The Board seeks comment on all aspects of eliminating the
contractual clearing balance program. The Board specifically seeks
comments on the following issues related to the effect of eliminating
the program on imputing costs to be recovered by Federal Reserve priced
services:
1. Would eliminating the contractual clearing balance program
materially diminish the value of Federal Reserve priced services? If
so, how?
2. Are there any operational difficulties related to the
elimination of the contractual clearing balance program as proposed? If
so, how long is needed to prepare for the elimination of the program?
3. In order to determine the imputed return on equity (profit) of
Federal Reserve priced services, an equity financing rate is applied to
the level of equity on the priced services balance sheet. Under the
proposed PTF model, the imputed equity level would be computed based on
the priced services net funding need (assets less liabilities). Without
the clearing balance liabilities and the associated imputed
[[Page 64256]]
investments, the net priced services' funding need may be very low when
the level of assets associated with priced services assets closely
matches the level of liabilities. This, in turn, would generate a very
low level of imputed equity relative to assets (i.e., less than 5
percent of total assets).\24\ A lower equity-to-assets ratio under the
PTF model than the FDIC-required amount of 5 percent of total assets
under the current correspondent bank model would make the priced
services less comparable to the market as a whole.\25\ The Board seeks
comment on whether it should establish a minimum imputed equity level.
If so, the Board seeks comment on the approach it should use to ensure
the minimum imputed equity, such as adjusting the debt-to-equity mix
from the model (decreasing debt and increasing equity) and/or imputing
additional equity.\26\ The Board also requests comment on whether it
should use the FDIC minimum equity requirements for commercial banks
that are used in the current correspondent bank model or some other
basis for establishing the minimum level.
---------------------------------------------------------------------------
\24\ If liabilities exceed assets, the equity-to-assets ratio
could be negative.
\25\ For example, for 2003-2008, the average equity as a percent
of total assets for the market as a whole was 18 percent. The priced
services imputed equity represents its market capitalization as a
going concern entity.
\26\ Equity imputed in excess of the priced services funding
need would be offset by an increase in imputed investments and would
be invested in a risk-free investment that matches the time horizon
of the funding need (i.e. one-year Treasury bond).
---------------------------------------------------------------------------
4. The proposed PTF model reflected, in part, the recognition that
the financial characteristics of the Reserve Banks' priced services and
its competitors were becoming less comparable to banking organizations.
Even with the elimination of clearing balances, the Reserve Banks'
priced services would still incur (and include in its prices) the costs
and benefits related to float. Float occurs when the Reserve Banks
debit an institution's account for a transaction on a different day
than they credit the account of the institution receiving the funds.
Reserve Bank float currently represents approximately one-third of the
priced services balance sheet. Typically, depository institutions are
more likely to reflect large amounts of float, either debit or credit,
on their balance sheets than are other types of businesses; however,
these data are not separately reported. Nonbank payment processing
firms generate some float, but those amounts are generally a much
smaller percentage of their balance sheets than is currently the case
for the Reserve Banks' priced services balance sheet. The Board seeks
comment on whether the correspondent bank model should be replaced only
once the amount of float generated by priced services is a much smaller
proportion of the Reserve Banks' imputed balance sheet.
5. Effective Dates
The Board proposes to eliminate the contractual clearing balance
program and the use of as-of adjustments no earlier than the first
quarter of 2012 and to implement a common reserves maintenance period
and the penalty-free band around reserve balance requirements no
earlier than the third quarter of 2012. The Board requests comment on
whether the proposed effective dates are appropriate. The Board
specifically seeks comment on time that depository institutions will
need to effect the changes in their systems to adapt to these changes
and whether the cost of adapting to these changes will be material.
III. Initial Regulatory Flexibility Analysis
Congress enacted the Regulatory Flexibility Act (the ``RFA'') (5
U.S.C. 601 et seq.) to address concerns related to the effects of
agency rules on small entities. The RFA requires agencies either to
provide an initial regulatory flexibility analysis with a proposed rule
or to certify that the proposed rule will not have a significant
economic impact on a substantial number of small entities. In
accordance with section 3(a) of the RFA, the Board has reviewed the
proposed regulation, which would apply to all depository institutions.
Based on current information, the Board believes that although a
significant number of ``small banking organizations'' would be affected
by the rule, the rule would not have a significant economic impact on
these small entities because the amendments are intended to decrease
costs (5 U.S.C. 605(b)). Nonetheless, the Board has prepared an initial
regulatory flexibility analysis in accordance with 5 U.S.C. 603 in
order for the Board to seek comment on the potential impact of the
proposed rule on small entities. The Board will, if necessary, conduct
a final regulatory flexibility analysis after consideration of comments
received during the public comment period.
1. Statement of the need for, objectives of, and legal basis for,
the proposed rule. The Board is proposing to amend Regulation D to
simplify reserves administration. Section 19 of the Federal Reserve Act
authorizes the Board to impose reserve requirements on certain deposits
and other liabilities of depository institutions solely for the
purposes of implementing monetary policy. The Board's Regulation D
implements section 19 of the Act. The Board believes that the proposed
amendments to Regulation D will reduce the administrative and
operational costs associated with reserve requirements for depository
institutions.
2. Small entities affected by the proposed rule. The proposed rule
would affect all depository institutions. Pursuant to regulations
issued by the Small Business Administration (the ``SBA'') (13 CFR
121.201), a ``small banking organization'' includes a depository
institution with $175 million or less in total assets. Based on data
reported as of March 31, 2011, the Board believes that there are
approximately 10,723 small depository institutions. Out of these small
depository institutions, there are approximately 3,088 small depository
institutions that satisfy their reserve balance requirement on a one-
week maintenance period; approximately 1,927 small depository
institutions with contractual clearing balances; and approximately 108
small depository institutions that received at least one as-of
adjustment over the first five months of 2011.
3. Projected reporting, recordkeeping, and other compliance
requirements. The proposed rule imposes certain compliance requirements
on small depository institutions. Under proposed section 204.5(b)(2),
small depository institutions that satisfy their reserve balance
requirement on a one-week maintenance period (approximately 3,088)
would be subject to a two-week maintenance period. As noted above, it
would presumably not be necessary, however, for such a depository
institution to change its internal systems, as it could continue to
satisfy its requirement weekly, within the two-week maintenance period.
The proposed rules would also eliminate the contractual clearing
balance program, currently used by approximately 1,927 small depository
institutions. Although the contractual clearing program would be
eliminated, the Board does not anticipate that small depository
institutions would be negatively affected because small depository
institutions would receive explicit interest on excess balances instead
of earnings credits on clearing balances. Small depository institutions
could then use this explicit interest to pay for Reserve Bank priced
services or for other purposes. In addition, the proposed rule would
eliminate the use of as-of adjustments for deposit revisions. The Board
seeks information and comment on any costs, including
[[Page 64257]]
those costs associated with changes to internal systems, that would
arise from the application of the proposed rule.
4. Identification of duplicative, overlapping, or conflicting
Federal rules. The Board does not believe that any Federal rules
duplicate, overlap, or conflict with the proposed rule. The Board is
proposing in a separate proposal to amend the Board's Regulation J to
remove references to as-of adjustments in order to conform that
regulation to this proposal. The Board seeks comment regarding any
other statutes or regulations that would duplicate, overlap, or
conflict with the proposed rule.
5. Significant alternatives to the proposed rule. The Board is
unaware of any significant alternatives to the proposed rule that
accomplish the stated objectives of the Board to simplify the
administration of reserve requirements. The Board requests comment on
whether there are additional ways to reduce the burden associated with
the administration of reserve requirements on small entities associated
with this proposed rule.
IV. Paperwork Reduction Act Analysis
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320 appendix A.1), the Board reviewed the
proposed rule under the authority delegated to the Board by the Office
of Management and Budget (OMB). Although the mandatory data collected
on the deposits reporting forms \27\ are used by the Federal Reserve
for administering Regulation D and for constructing, analyzing, and
monitoring the monetary and reserve aggregates none of the revisions
proposed in this rulemaking would change the deposits reporting forms.
No collections of information pursuant to the PRA are contained in this
proposed rule.
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\27\ Report of Transaction Accounts, Other Deposits and Vault
Cash (FR 2900; OMB No. 7100-0087), Annual Report of Total Deposits
and Reservable Liabilities (FR 2910a; OMB No. 7100-0175), Report of
Foreign (Non-U.S.) Currency Deposits (FR 2915; OMB No. 7100-0237),
and Allocation of Low Reserve Tranche and Reservable Liabilities
Exemption (FR 2930; OMB No. 7100-0088).
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Comments on this analysis should be sent to Cynthia Ayouch, Federal
Reserve Board Clearance Officer, Division of Research and Statistics,
Mail Stop 95-A, Board of Governors of the Federal Reserve System,
Washington, DC 20551, with copies of such comments sent to the Office
of Management and Budget, Paperwork Reduction Project (Regulation D),
Washington, DC 20503.
List of Subjects in 12 CFR Part 204
Banks, banking, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Board proposes to amend
12 CFR part 204 as follows:
PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
(REGULATION D)
1. The authority citation for part 204 continues to read as
follows:
Authority: 12 U.S.C. 248(a), 248(c), 461, 601, 611, and 3105.
2. In Sec. 204.1, revise paragraph (b) to read as follows:
Sec. 204.1 Authority, purpose and scope.
* * * * *
(b) Purpose. This part relates to reserve requirements imposed on
depository institutions for the purpose of facilitating the
implementation of monetary policy by the Federal Reserve System.
* * * * *
3. In Sec. 204.2:
A. Remove and reserve paragraphs (v) through (x);
B. Revise paragraphs (z) and (bb); and
C. Add paragraphs (ee) through (hh).
The additions and revisions read as follows:
Sec. 204.2 Definitions.
* * * * *
(z) Excess balance means the average balance held in an account at
a Federal Reserve Bank by or on behalf of an institution over a reserve
maintenance period that exceeds the top of the penalty-free band.
* * * * *
(bb) Balance maintained to satisfy the reserve balance requirement
means the average balance held in an account at a Federal Reserve Bank
by or on behalf of an institution over a reserve maintenance period to
satisfy the reserve balance requirement of this part.
* * * * *
(ee) Reserve balance requirement means the balance that a
depository institution is required to maintain on average over a
reserve maintenance period in an account at a Federal Reserve Bank if
vault cash does not fully satisfy the depository institution's reserve
requirement imposed by this part.
(ff) Deficiency means the bottom of the penalty-free band less the
average balance held in an account at a Federal Reserve Bank by or on
behalf of an institution over a reserve maintenance period.
(gg) Top of the penalty-free band means an amount equal to an
institution's reserve balance requirement plus an amount that is the
greater of 10 percent of the institution's reserve balance requirement
or $50,000. The top of the penalty-free band for a pass-through
correspondent is an amount equal to the aggregate reserve balance
requirement of the correspondent (if any) and all of its respondents
plus an amount that is the greater of 10 percent of that aggregate
reserve balance requirement or $50,000.
(hh) Bottom of the penalty-free band means an amount equal to an
institution's reserve balance requirement less an amount that is the
greater of 10 percent of the institution's reserve balance requirement
or $50,000. The bottom of the penalty-free band for a pass-through
correspondent is an amount equal to the aggregate reserve balance
requirement of the correspondent (if any) and all of its respondents
less an amount that is the greater of 10 percent of that aggregate
reserve balance requirement or $50,000.
4. In Sec. 204.4 revise paragraphs (d) and (e), and the
introductory text of paragraph (f), to read as follows:
Sec. 204.4 Computation of required reserves.
* * * * *
(d) For institutions that file a report of deposits weekly, reserve
requirements are computed on the basis of the institution's daily
average balances of deposits and Eurocurrency liabilities during a 14-
day computation period ending every second Monday.
(e) For institutions that file a report of deposits quarterly,
reserve requirements are computed on the basis of the institution's
daily average balances of deposits and Eurocurrency liabilities during
the 7-day computation period that begins on the third Tuesday of March,
June, September, and December.
(f) For all depository institutions, Edge Agreement corporations,
and United States branches and agencies of foreign banks, reserve
requirements are computed by applying the reserve requirement ratios
below to net transaction accounts, nonpersonal time deposits, and
Eurocurrency liabilities of the institution during the computation
period.
* * * * *
5. In Sec. 204.5:
A. Revise paragraphs (a)(1), (b), (c), and (d); and
B. Remove paragraph (e).
The revisions read as follows:
Sec. 204.5 Maintenance of required reserves.
(a)(1) A depository institution, a U.S. branch or agency of a
foreign bank, and an Edge or Agreement corporation shall satisfy
reserve requirements by maintaining vault cash and, if vault cash does
not fully satisfy the institution's
[[Page 64258]]
reserve requirement, in the form of a balance maintained--
(i) In the institution's account at the Federal Reserve Bank in the
Federal Reserve District in which the institution is located, or
(ii) With a pass-through correspondent in accordance with paragraph
(d) of this section.
* * * * *
(b)(1) For institutions that file a report of deposits weekly, the
balances maintained to satisfy reserve balance requirements shall be
maintained during a 14-day maintenance period that begins on the third
Thursday following the end of a given computation period.
(2) For institutions that file a report of deposits quarterly, the
balances maintained to satisfy reserve balance requirements shall be
maintained during an interval of either six or seven consecutive 14-day
maintenance periods, depending on when the interval begins and ends.
The interval will begin on the fourth Thursday following the end of
each quarterly reporting period if that Thursday is the first day of a
14-day maintenance period. If the fourth Thursday following the end of
a quarterly reporting period is not the first day of a 14-day
maintenance period, then the interval will begin on the fifth Thursday
following the end of the quarterly reporting period. The interval will
end on the fourth Wednesday following the end of the subsequent
quarterly reporting period if that Wednesday is the last day of a 14-
day maintenance period. If the fourth Wednesday following the end of
the subsequent quarterly reporting period is not the last day of a 14-
day maintenance period, then the interval will conclude on the fifth
Wednesday following the end of the subsequent quarterly reporting
period.
(c) Cash items forwarded to a Federal Reserve Bank for collection
and credit are not included in an institution's balance maintained to
satisfy its reserve balance requirement until the expiration of the
time specified in the appropriate time schedule established under
Regulation J, ``Collection of Checks and Other Items by Federal Reserve
Banks and Funds Transfers Through Fedwire'' (12 CFR part 210). If a
depository institution draws against items before that time, the charge
will be made to its account if the balance is sufficient to pay it; any
resulting deficiency in balances maintained to satisfy the
institution's reserve balance requirement will be subject to the
penalties provided by law and to the deficiency charges provided by
this part. However, the Federal Reserve Bank may, at its discretion,
refuse to permit the withdrawal or other use of credit given in an
account for any time for which the Federal Reserve Bank has not
received payment in actually and finally collected funds.
(d)(1) A depository institution, a U.S. branch or agency of a
foreign bank, or an Edge or Agreement corporation with a reserve
balance requirement (``respondent'') may select only one pass-through
correspondent under this section, unless otherwise permitted by the
Federal Reserve Bank in whose District the respondent is located.
Eligible pass-through correspondents are Federal Home Loan Banks, the
National Credit Union Administration Central Liquidity Facility, and
depository institutions, U.S. branches or agencies of foreign banks,
and Edge and Agreement corporations that maintain balances to satisfy
their own reserve balance requirements, which may be zero, in an
account at a Federal Reserve Bank. In addition, the Board reserves the
right to permit other institutions, on a case-by-case basis, to serve
as pass-through correspondents.
(2) Respondents or correspondents may institute, terminate, or
change pass-through correspondent agreements by providing all
documentation required for the establishment of the new agreement or
termination of or change to the existing agreement to the Federal
Reserve Banks involved within the time period specified by those
Reserve Banks.
(3) Balances maintained to satisfy the reserve balance requirements
of a correspondent's respondents shall be maintained, along with the
balances maintained to satisfy the correspondent's reserve balance
requirement (if any), in a single commingled account of the
correspondent at the Federal Reserve Bank in whose District the
correspondent is located. Balances maintained in the correspondent's
account are the property of the correspondent and represent a liability
of the Reserve Bank solely to the correspondent, regardless of whether
the funds represent the balances maintained to satisfy the reserve
balance requirement of a respondent.
(4)(i) A pass-through correspondent shall be responsible for
maintaining balances to satisfy its own reserve balance requirement (if
any) and the reserve balance requirements of all of its respondents. A
charge for any deficiency in the correspondent's account will be
imposed by the Reserve Bank on the correspondent maintaining the
account.
(ii) Each correspondent is required to maintain detailed records
for each of its respondents that permit Reserve Banks to determine
whether the respondent has provided sufficient funds to the
correspondent to satisfy the reserve balance requirement of the
respondent. The correspondent shall maintain such records and make such
reports as the Board or Reserve Bank may require in order to ensure the
correspondent's compliance with its responsibilities under this section
and shall make them available to the Board or Reserve Bank as required.
6. In Sec. 204.6, revise the heading and revise paragraphs (a) and
(b) to read as follows:
Sec. 204.6 Charges for deficiencies.
(a) Federal Reserve Banks are authorized to assess charges for
deficiencies at a rate of 1 percentage point per year above the primary
credit rate, as provided in Sec. 201.51(a) of this chapter, in effect
for borrowings from the Federal Reserve Bank on the first day of the
calendar month in which the deficiencies occurred. Charges shall be
assessed on the basis of daily average deficiencies during each
maintenance period.
(b) Reserve Banks may waive the charges for deficiencies based on
an evaluation of the circumstances in each individual case.
* * * * *
7. In Sec. 204.10 revise paragraphs (b)(1), (b)(3), (c), (d)(3)
and (e)(2) to read as follows:
Sec. 204.10 Payment of interest on balances.
* * * * *
(b)(1) For balances up to the top of the penalty-free band, at \1/
4\ percent;
* * * * *
(3) For balances up to the top of the penalty-free band, excess
balances, and term deposits, at any other rate or rates as determined
by the Board from time to time, not to exceed the general level of
short-term interest rates. For purposes of this subsection, ``short-
term interest rates'' are rates on obligations with maturities of no
more than one year, such as the primary credit rate and rates on term
Federal funds, term repurchase agreements, commercial paper, term
Eurodollar deposits, and other similar instruments.
(c) Pass-through balances. A pass-through correspondent that is an
eligible institution may pass back to its respondent interest paid on
balances maintained to satisfy the reserve balance requirement of that
respondent. In the case of balances held by a pass-through
[[Page 64259]]
correspondent that is not an eligible institution, a Reserve Bank shall
pay interest only on the balances maintained to satisfy the reserve
balance requirement of one or more respondents up to the top of the
penalty-free band, and the correspondent shall pass back to its
respondents interest paid on balances in the correspondent's account.
(d) * * *
(3) Balances maintained in an excess balance account will not
satisfy any institution's reserve balance requirement.
* * * * *
(e) * * *
(2) A term deposit will not satisfy any institution's reserve
balance requirement.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, October 7, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-26770 Filed 10-17-11; 8:45 am]
BILLING CODE 6210-01-P