[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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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